Saturday, December 31, 2011

"Vapor" Opportunities

I often tell my students to be very careful when considering a new business opportunity if you are on the outside looking in with a solution to a problem you perceive to exist.  An example would be for someone with software development experience in, say, customer service software who decides to develop software to automate some aspect of medical records in doctor's offices.  He or she talks to a few office managers for doctor's offices and develops a set of features for this software based on this very limited information.

Our entrepreneur then induces a doctor's office to be a beta site for the software and, with a great deal of hand holding, decides that the beta site was a success.  This is a disaster about to happen.  Usually, the doctor's office in the beta test has not paid money to use the software and, therefore, didn't have to consider the value versus the cost of the software product.

Inevitably, the software needs many bells and whistles to handle all the variations "required" by different doctor's offices making it impossible to charge a price that the doctor's offices are willing to pay that will cover the actual cost of delivering the product.  The entrepreneur deceives him or herself into believing the "value-added" by using the product exceeds the price the entrepreneur must charge and the entrepreneur runs out of cash chasing a "vapor" opportunity.

Compare this to a person with some knowledge of software who works as an administrator  in a large doctors' office who sees the need for a similar product, but with a simplified set of features that will meet the need.  He or she sees that the product can be developed, from the beginning, to have flexibility to handle additional features, if a doctors' office is willing to pay for them.  This person decides to team with a software developer and designs the software to meet the real needs of a doctor's office that have subtle, but very important, differences from the needs perceived by our first entrepreneur.  The bells and whistles (that often cost more to develop than the basic product and often cause more problems for the customer) are offered only as add-ons.  This entrepreneur has a real chance of succeeding.

What I've described above happens very often.  The first entrepreneur conducted a superficial analysis of the problem he or she perceived to exist and developed a product without knowing the subtle aspects of the customer's problem that will be the difference between success and failure of the product.  This often happens because of an arrogance on the part of the first type of entrepreneur who thinks he or she can understand the customer's need and thinks he or she knows the decision making process the potential customer will use in deciding whether or not to pay money for the product.

In reviewing a business plan, I always look for a section that walks the reader through the thinking process of a potential customer in deciding to purchase the product.  I very seldom find this analysis and, when I ask the entrepreneur to verbally tell me, the entrepreneur can only give me generalities that are useless.  Yet, when I ask someone like the second entrepreneur described above who has had personal experience in dealing with the problem, he or she can usually give a very good explanation of the customer's decision making process.  Which of these entrepreneurs is likely to raise capital from investors? 

The lesson - team up with a person with real experience at dealing with the problem you think you can solve with your product; not by simply interviewing the person, but  by making the person a part of your team!

Wednesday, July 6, 2011

The best way to prepare for a major negotiation

All entrepreneurs need to be good negotiators.  Few are.  Why?  Because they usually have little experience at negotiating major matters and have no training in negotiation.  Negotiation skill is not intuitive, it is learned.  I teach Negotiation in the Rollins MBA program and hammer into my students that the key to successful negotiation is preparation.  Although there are many aspects to preparation, the one that is most important, yet usually missing, is to develop a good alternative to whatever you are about to negotiate.  That is, if you are preparing to raise capital from angel investors, know what angel investors want and the terms to expect.  But, more importantly, court more than one angel or angel group at a time so you can turn down an unacceptable deal .  The strongest way to negotiate is to let it be known that you have an alternative deal that may be better than the deal the other side is trying to negotiate with you.  Otherwise, you are negotiating from weakness and the other side will spot that weakness immediately.  OK.  Why doesn't everyone do this?  Because it is very difficult to develop the relationships necessary to have an angel or angel group take an interest in making an investment into your company.  If you follow my advice, you have to develop at least two of these relationships in parallel and manage the process so that you have at least two potential investors or groups of investors with whom you will negotiate at the same time.  But, you say, don't all investors or investor groups ask who else is considering an investment in your company and insist that you tell them their names?  Yes, this is a common practice by investors, but you have to have the courage to say you won't disclose this information.  An investor who walks away solely because you won't tell the investor the name of the investor's competition is an investor who will probably demand unacceptable terms anyway.

So, the best preparation for a heavy duty negotiation is to lay the groundwork to have an acceptable alternative to the deal you are about to negotiate.  This takes planning and time.

Tuesday, June 28, 2011

All major corporations should be inspired by the story of the British Mustang

A story appeared in Slate Magazine several weeks ago that should inspire all large corporations to encourage entrepreneurial thinking in their organizations.  Here's the link

Sunday, March 6, 2011

More thoughts on raising capital from angel investors

Over the past few months, I've had the opportunity to speak to groups about the difficulty in raising capital from angel investors. I always emphasize the need to establish a relationship with several angel investors before asking them to invest. This takes more time than many companies have to raise capital before going out of business. Therefore, most companies have to bootstrap for up to a year while establishing relationships with credible angels and angel groups.

There is a trend toward angel investors forming angel groups. I think this will help companies that qualify to raise capital from angels, but companies need to recognize the time it takes to go through the process of getting money from an angel group. I hope the formation of angel groups results in better access to capital for entrepreneurial companies.

But, it still takes more time than most entrepreneurial companies can imagine to raise capital from angels. I often advise early stage companies that they need to "raise capital to raise capital." Otherwise, the company can't stay in business long enough to develop the relationships with angel investors necessary to raise a serious amount of capital.

Raising capital from non-strangers, not angels

Over the years, I have counseled clients who set out to raise capital from angel investors that they need to focus on angels with whom they have relationships, directly or indirectly. The probability of raising capital from angels with whom the entrepreneur has no relationship is extremely low. Therefore, logically, the entrepreneur must start developing or pursuing relationships with potential angel investors from the get-go since these relationships are difficult and time consuming to develop.

I've decided to call angels with whom an entrepreneur has relationships Non-Strangers. This seems like an odd name, but it is descriptive of the angels who actually invest in most companies. Yet, most entrepreneurs don't get it. They think that they can simply find wealthy people, present a business plan and some of them will invest. This is usually a waste of time for both the entrepreneur and the wealthy person.

Angel investors should be viewed as customers

When an entrepreneur comes to me for advice on raising capital from angel investors, I ask him or her "Do you know why angels make investments in early stage companies?" Inevitably, the answer reflects superficial thinking and deserves an "F." Most entrepreneurs do not have the foggiest idea about what it takes to raise capital from angel investors and make little effort to find out. They seem to think that if they have a good business plan and enthusiasm, angel investors will invest.

Any entrepreneur who decides to raise capital from angel investors should conduct as much research on why angels invest as they do on why customers buy their products or services. Few entrepreneurs even read a book on how to raise capital from angels when there are many books on the subject through Amazon. It's no wonder that most entrepreneurs who set out to raise capital from angels fail miserably.

Every angel investor is different, just like every customer is different. But, there are some characteristics that are common to most angel investors. If an entrepreneur would come to me for advice on raising capital and demonstrated the same degree of ignorance about his or her customers as the entrepreneur usually demonstrates about angel investors,I would tell the entrepreneur to find another occupation.

Why is it that entrepreneurs make little effort to find out the same type of information about angel investors, yet will work really hard to find out about the characteristics of potential customers? I attribute this to an underlying sense in most entrepreneurs that an angel investor is not a "buyer or customer" but is a "seller or supplier." An erroneous view is that an angel investor is "selling capital" to the entrepreneur and the price to be paid is an equity interest in the entrepreneur's company. Not true. The seller in this case is the company, selling an equity interest to the angel investor who is buying, not selling. If an entrepreneur would only take this view of angel investors, the entrepreneur would do extensive research into the characteristics of the angel investor market. How many angel investors will the entrepreneur have access to, what is the decision making process for an angel investor, who influences the angel investor to make the investment, what is the competition for the angel investor's funds, what will it take to get an angel investor to seriously consider the entrepreneur's opportunity, etc. These are the types of questions the entrepreneur would seek answers to for his or her customers; why not seek this information about angel investors?

Finding out the characteristics of the angel investor market is difficult, but not impossible. It is inexcusable for entrepreneurial companies who set out to raise capital from angel investors not to know as much about the angel investor market as they know about their potential customers.