What self-funded entrepreneurs can learn from venture capitalists
Scene from HBO’s “Silicon Valley”
When you search entrepreneurial advice or follow entrepreneurial publications you quickly find the bulk of material available is focused on the tech industry, and more specifically those entrepreneurs in the tech industry seeking venture capital. These blogs/ podcasts/ whitepapers/ slideshares tend to focus on how to frame your business opportunity for a sophisticated investor and can get very complex in detailing how to think about PRESENTING your business opportunity and often leave out, or remain frustratingly vague, on VALIDATING your business opportunity. While this is where the money is for most publications, the vast majority of entrepreneurs are not seeking venture capital. Quite the opposite, they are thinking about how to take their concept, validate an opportunity, and actually launch a business without a board of directors, a team, or investors to support them. An unfortunate symptom of this fact is that most entrepreneurs outside of technology often skip the step of validating an opportunity for themselves when they aren’t forced to validate it for an outside party. Putting the unfortunate lack of material designed for the typical self-funded entrepreneur aside, we maintain the core principles of how an investor reviews a tech startup are not too dissimilar from how any potential entrepreneur should assess their own opportunity.
Before taking the leap, most self-funded entrepreneurs have a skill, passion, hobby that they intend to share with the world, but often become paralyzed on moving forward because they remain unsure of how to articulate that into a viable business. Unfortunately even worse, some aren’t paralyzed at all, and instead will charge ahead with building, launching, and marketing a product without giving any thought to defining their business opportunity first, the way a tech entrepreneur might have to in order to get funding.
Adopting Investor Principles
One survey published by Inc. Magazine in “What VC’s Really Care About” sheds light on the investor mindset.
At the top of the list of ‘most important’ factors is Potential Return with 30.4%. At first return on investment may seem unrelated, but they are simply trying to answer the question, with the dollars we are putting behind this business, what is the ultimate Market Opportunity?
A close second is Founder Experience at 27%. This is the investor assessing the Team Capabilities of a startup and ensuring the skills and passions align with the business opportunity. Where weaknesses exist can the team identify them and work around them?
Third on the list is Market Readiness at 26.4%. In other words: is the business prepared to enter a market with a product that market will value? We refer to this generically as Product-Market Fit.
The remainder of the list is unique to investor-driven businesses, and with over 80% of responses for the above three, we have a clear indications of how an investor will assess a business opportunity.
How do they translate to the self-funded entrepreneur?
We believe, with some tweaks, investor principles can be applied to the average person’s side or small business. As a self-funded entrepreneur you may be talking much smaller dollars than a big investor, but we would argue the money you do set aside, and more so the time you commit, is far more precious to you than capital is to the venture investors doing rigorous business opportunity analysis.
Below are some principles that are core to an investor assessment that we believe should be applied for any entrepreneur to work through when deciding whether or not to invest their own time and money into a startup. Said slightly differently, the check an investor writes into a startup opportunity is the same thing as the time and money a self-funded entrepreneur will dedicate to their own small business. This is a simple step-by-step framework that pulls out some of those core investor principles of assessing an INVESTMENT opportunity and applies them to a self-funded entrepreneur assessing their own BUSINESS opportunity.
Product-Market Fit
Venture investors like to see a validation that a product, in its design, pricing, marketing, and positioning, is aligned with a specific market of customers’ needs and behaviors. A common mistake every entrepreneur makes is focusing far too much on one side of this equation. Either they will obsess over the product as conceived in their own mind and not the audience need their product might address or, alternatively, they will spend all efforts on marketing and building a big audience without enough attention given to resource-constrained plans for entering that market and competing with the established companies already serving it. The self-funded entrepreneur may have a more niche market with a less disruptive product, but it’s critical when assessing an opportunity to identify and understand where your product meets a market need.
Market Opportunity
Venture investors want to see a big opportunity that their big dollars can be applied to, but any self-funded entrepreneur will need to have an equally valid opportunity, albeit a smaller one, where there is a need in the market not being met. This does not mean you won’t have competitors, or be the only person in your field, but it does mean you need to give consideration to the audience you seek to serve, and how they solve their need for your value today (without you). With the time and money you are considering investing into a particular opportunity, you need to have some confidence that you will be able to solve the needs of an audience better than the status quo in some way. To be clear, no one can snap their fingers and have a perfect product, but can you see yourself, over time, creating a product with enough value that an audience will change their behavior to select you over what they do today.
Team Capabilities
Venture investors will often say team is the most important component of success. They will objectively look at the participants in a team and ask very tough questions about whether the right skills and passions exist around the table. You are a team of one, and perhaps the hardest thing to do is try and look at ourselves and our capabilities objectively. That said its critical for any self-funded entrepreneur to have enough self-awareness to understand their own strengths and weaknesses and ensure that a) you have the skills to accomplish your goals, b) you have a passion for the opportunity that will push you through inevitable tough times, and c) you know your own weaknesses well enough to plan around them and set up processes and controls in your own life to mitigate any downside they might cause.
Assessing opportunity before launch
While we wouldn’t ever say 84% of venture capitalists can’t be wrong ;) we do see the above framework as an important first step for any self-funded entrepreneur to assess their potential personal investment in their own business opportunity. At Low Finance we teach the detailed application of these principles in our Concept to Opportunity course as the first step for any soon-to-be entrepreneur to take. Spending time upfront in assessing and crafting a business opportunity will help avoid countless dollars and months being spent trying to create the wrong product and sell it to the wrong people.