Startups can offer amazing experiences
Start-ups can either define or redefine how we interact at work, home or fun, and they are generally centered by a passionate set of individuals who can see and believe in a better way. The environment is so different from the corporate world. I describe my start-up experience as equal measures of excitement and terror – which is why you need the passion to endure the ups and downs of a start-up.
Start-ups bring you to the basics of business, there are no corporate policies or processes, no layers of management, limited support structure, and it’s simply defining how to successfully solve, deliver and sell a solution to a customer need.
You will certainly have a title and be responsible for key areas, but the role is often defined by what is needed to keep going, not by the standards of a larger firm. As CFO of a start-up, in a single day I had an investor pitch, helped carry store inventory, finalized our pricing strategy and then went back to the store to help move displays. I have also written copy for web pages, designed customer pitches, gone on sales calls, etc. – the funny thing is you will find yourself just feeling this is normal.
If you are considering a start-up, here are four items that will help indicate their chance for success.
With so many successes, new forms of funding capital, ease to gain technology, self-marketing, and start-up support structures, there are more start-ups than ever. This simply means you have more to choose from and need to determine which has a chance for success.
ONE: Experienced management team
The experience is they have succeeded in the industry, commercialized similar products or launched start-ups. These are critical factors as there is simply limited room for repeated errors – so the team simply needs to have a rock solid business plan.
I am a fan of failure, as it is one of the best teachers of how to become better – people who succeed do so because they can see the problems coming and know to change course. If you have never failed, then hard to know what might hit you.
TWO: Large addressable market
There are loads of good ideas, but you really need to understand how big market is for the product to determine what kind of company it can become.
To attract talent and capital of any significance (in the millions), there needs to be a large market. The term ‘large’ is defined differently by every investor, but if your total market does not give you a revenue potential north of $50 million – it’s going to be hard to raise capital of any significance. Investors will be looking for large multiples (10X, etc.) on the capital invested, so there has to be a market to support large revenue opportunity that either the start-up or an acquirer can achieve.
THREE: Protectable Intellectual Property
The intellectual property is essential to the value of a company; it’s what draws customers and investors. The intellectual property may be possessed at the start of a venture, via a patent or process, or built over time like a customer database. No IP is completely protected, but it should be very defensible from replication or replacement.
Here’s the other question you need to ask when it comes to the IP “Is this a product or a company?” When the IP can be extended to new markets, needs, etc. then you are more likely to have a company on your hands.
FOUR: Capital plan
Understanding the capital needs for growth is critical. A common shortcoming of early stage company business plans is an assumption that one round of funding is enough. Typically, it takes several rounds of fundraising to achieve moving from product development to beta testing to initial rollout to full distribution. Every entrepreneur is going to be optimistic, so being a little aggressive is okay, it’s when the story does not fit the size of capital being sought is when you need to worry.
You should understand where they are in the capital process as well to understand if they can bring you on and the type of risk you are undertaking.
Best way to evaluate – Meet the founders
I’ve met with several dozen start-ups and use this simple rule of thumb: Spend an hour with the founders to see how good of a feeling they have on these items.
o If you get satisfactory answers, then start walking through the business plan in greater detail to see if the tactics match the strategy – this is when you’ll see whether or not they can take advantage of the opportunity.
o If not, then wait to read the business plan until they are ready – if you read it at this stage, you will just be noting the holes you already identified.
Good luck today!
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