So You are Thinking about a Startup Business in 2016: How to Get to Yes or No (Part 3)

So You are Thinking about a Startup Business in 2016: How to Get to Yes or No (Part 3)

Man-at-crossroads-300x241Part 3 in our 4 part series - So You Are Thinking about a Startup Business in 2016.

In the last post in this series, I listed many of the key factors, both personal and in your business, that I believe are important if you want to succeed with an innovative business.  Take a moment to go back and review the previous post on those factors.  You may find this kind of list to be difficult to remember and believe.  This post covers a different way to answer the question of whether you should start an innovative business.

Part 1 - So you are thinking about a startup business in 2016 - 5 reasons not to
Part 2 - So you are thinking about a startup business in 2016 - essential business and personal factors

I've spent many years thinking about this subject and accumulating the essential factors of innovative business success.  In doing this, I had the advantage of being a member of Tech Coast Angels (one of the largest angel clubs in the U.S.) for a number of years.  While there, I observed dozens of companies and founders up close, took part in vetting about 600 companies, invested in a number myself, listened to uncountable lectures and panel discussions on this topic, and most important, took the time to ask 30 other investors exactly what they look for in an investable company.  By listening to other investors and asking the same question over and over (what do you look for in an investable company?) I began to find some factors that are not mentioned in books on the subject.  One of these lesser known but essential factors for example is the need for encouragement and acceptance from your spouse (or domestic partner.)

In addition, my own personal experience is helpful.  I've been part of the startup partnership in seven businesses (not as many as Richard Branson but more than most people) and have not always used this question, and suffered as a result in a few of those businesses. It's interesting that all but one of those attempts were successful eventually, which says a lot about my persistence, but suffering is not necessary.  Get started without a handicap and you're less likely to suffer along the way. Most of the important factors that emerged from these discussions with investors and from my own experience were summarized in the prior post. These are great insights.

The problem is, unless you're a professional analyst, a list like that in the previous post is difficult to digest.  Your exciting idea, like love, blinds you to the realities you'll have to face.  And so you ignore or discount a list like I've presented. I'd like to suggest a different way to attack this question. There is a question to ask yourself that I've found indispensable in deciding whether or not to start an innovative business. Here it is:

If I were a professional investor, would I invest in this business?

This is hard to ask because you probably don't know how a professional investor thinks.  On the other hand, you're thinking about investing your limited resources, all of your reputation and a lot of your time.  So looking at your idea from the point of view of an investor is the same as taking an objective look at your own passion and protecting yourself.

Ask this question from a gut level first.  Write an elevator pitch or advertising piece describing your main product, and describing your founding team, let it sit for a day, then read it with fresh eyes.  At a gut level, would you invest in this business?  If your gut says no, take your gut seriously, and keep developing the idea further before you take it further.

Frankly, however, even this trick won't work well. Your passion to make a difference and heroically succeed in business is not unlike a passion for a lover.  Love IS blind.  You can't get around this by talking to yourself.  You've just got to ask others who will be honest with you.

So let me state the different way to approach this all-important question. The bottom line is simply: ASK AT LEAST FIVE ANGEL INVESTORS IF YOUR STARTUP IDEA IS INVESTABLE.  These have to be investors you trust, who'll give you an honest appraisal without worrying about your feelings or your relationship.

Startup business - yes, no, maybeHere are five important things to remember:

  1. If anyone says no or maybe, ask why.
  2. If anyone says no or maybe, ask what factors would have to be changed to enable a Yes answer
  3. For those who answer yes, ask how you can improve it further.
  4. You don't need unanimous consent,  some people just won't like the idea for personal reasons. What you should look for is at least a majority say yes or maybe.
  5. Important - when describing the business, also describe your own personal traits and those of your founding partner(s).  Be as thorough as possible, and admit openly to weaknesses needing development.

Getting even five such conversations from angel investors is not easy.  The best place to find them is in your local angel investment club, like Tech Coast Angels or Maverick Angels in Southern California.  You can easily find these groups online.  Your context or attitude in having these conversations should be not to secretly hope that one of them will actually invest.  Your context should be genuine curiosity about their point of view.

Remember also that you won't be well-served by taking a new idea directly to an angel group for the first round of investment.  Your first round of investment - the seed round - should, generally, be from friends and family and other individuals who you have access to in your circle. Angels (and for the fortunate few, venture capital firms) come later, after you've raised seed capital and developed a proof-of-concept product or service, or better yet, developed your product or service all the way to "ready for market."  So it's rational to take your initial ideas and bring them to the local angels, not for the of getting an investment yet, but for the purpose of getting their opinions on whether it WILL be investable when ready for the market.  You may have to buy lunch more than once, but THAT investment is always worth it.

Many incubators and accelerators exist in every metro region in North America, where you can obtain this kind of opinion at no charge.  In Southern California for example, Connect provides a program called Springboard where you can get feedback from a mix of investors and business coaches.

Takeaway:  There's no way around this, because love IS blind, and passion for an innovative idea IS a form of love.  Ask at least five professional investors who aren't personal friends to evaluate your business idea AND the personal traits of each member of your founding team, including yourself of course.  You can find the right investors at local angel clubs and business accelerators.  This won't be easy but it's essential and you've got to take the answers you hear seriously. You can use the answers to iterate your ideas and team and make it even more likely to succeed.

In part four of "So You are Going to Start Up a Business in 2016", we will talk about Entrepreneur's - The Most Important Question to Ask Yourself.