Part 2 of 4 – So You are Thinking of Startup Business in 2016 – Essential Business and Personal Factors
In part one of this topic, we covered five reasons not to do a startup in 2016 (and some great reasons to start a business). At the heart of Intelliversity’s business philosophy, there is one predominant component for success in an innovative business – and that is the degree of innovation. In part 2, we take a deeper cut into the factors, including innovation, that a startup must consider and implement to be successful in today’s crowded business environment.
Enjoy part 1 here: So You are Thinking of Startup Business in 2016 – 5 Reasons Not To
Essential Business Factors
Here are some well-accepted business factors necessary to win at innovation with a startup. I’ve spoken to many investors over the years and as an investor myself came to the same conclusions. If all of these are true for you and your business idea, you have a reasonable chance of succeeding: There has to be a market opportunity by the time your product is ready for market, or a preexisting one.
Your market has to:
- Need the solution you provide
- Recognize it needs the solution
- Be willing and able to pay for it
Norman Winarsky, one of the inventors of Siri, described the best way to match an invention with a market opportunity, in an article in Harvard Business Review, October 31, 2015 entitled “The Man Behind Siri Explains How to Start a Company“:
“First of all, starting with the market problem, [the answer is] taking that market problem and then finding, as we said, the technology solution and/or differentiated business solution and the great team. And then you’re iterating on that in terms of go-to-market.” In other words, start by looking for a problem that needs solving today, assemble a team with the necessary skills and then invent a solution, not the other way around.
As markets are constantly changing, this is largely a timing issue. An invention may correctly anticipate a market need, but it may be an expensive failure if the market need, recognition and willingness to pay are still years in the future. Ray Kurzweil, prolific inventor and author of The Singularity is Near, points out the timing problem and many other critical nuances of the invention process in “Kurzweil’s Rules of Invention“, an article appearing in MIT Technology Review, October 2014, and concludes:
“Based on these insights, I offer a three-step program for beginning the invention process, good for innovators from the lone inventor to the large corporate team.
Step one is to write the advertising brochure. This can be a real challenge. It compels you to list the features, the benefits, and the beneficiaries. You will find this impossible to accomplish if your ideas are not well formed.
Step two: use this brochure to recruit the intended users. If these beneficiaries don’t immediately get excited about your concept, then you are probably headed down the primrose path. Invite them to participate in creating the invention. After all, if they want it so badly, let them help you invent it.
Finally, engage in some fantasy. Sit down, close your eyes, and imagine that you’re giving a speech some years from now explaining how you solved the challenging problems underlying your new invention. What would you be saying? What would you have to be saying? Then work backward from there.”
Here are important considerations from my research and experience:
1. Your innovative idea produces a highly significant improvement over existing products or services – the “Rule of 10x”
Your idea can be 10 times less expensive (1/10th the price), 10 times faster or 10 times better in some important way. It can be a combination of these. For example, your proposed product can be 1/2 the price of existing products, twice as fast and three times better in some other way. That’s 2 X 2 X 3 or 12 times better than existing products. That would be a potential winner.
This is not to say that a product or service that is an improvement by only a factor of 5 is not a potential winner. It is. Even an improvement by a factor of 2 (half the cost or twice as fast or twice as good) is a potential winner. What is well-accepted is that a factor of 10 improvement is highly investable by itself, whereas lower improvement factors are riskier.
On the other hand, if you hope to succeed in an innovative business by producing a product that is say 20% less expensive than available competition, and not better in any other way, chances are you won’t succeed. This is true because your existing competition will find a way to reduce the price or out-market you. You need a bigger advantage.
2. Your advantage has to be “unfair” in some way.
Another way to say this is that you must have a “moat” or “barrier to entry”. This factor is a way of preventing other existing companies from introducing products or services essentially the same as yours. This can be a patent, a proprietary process, or an exclusive relationship, An example of an exclusive relationship I’ve seen is stamps.com, who has an exclusive relationship with the U.S. Postal Service to provide postal stamps over the Internet. Note that patents are notoriously difficult and expensive to defend and require you to disclose your proprietary methods. Many experienced entrepreneurs prefer holding their proprietary methods secret and relying on their first-to-market status and the difficulty of replicating the proprietary method.
3. You must have a founding partner.
Increasingly, experts agree you can’t do it alone. This does not mean an “equal partner” – 50/50 ownership. It means two individuals with substantial ownership or participation. In our opinion, you and your partner must share a passion for your business idea and share many (though not necessarily all) business-related values. Also, it is important for partners to be complementary in work preferences, leadership style and skill sets. At least one of you should have a background in the field you are entering. (If you’re going to raise your hand and point out that Elon Musk had no background in rocketry, note his second in command at Space-X, Gwynne Shotwell, does have the necessary background.) Your ownership shares should be proportional to your level of motivation and time available. In general, 50/50 is not desirable, though may be unavoidable. Avoid selecting a partner who is a good friend, relative or spouse. Best is someone you’ve worked with for a year or more so you know each other. Trust is key.
For more information on this critical subject of partnership, refer to The Founder’s Dilemmas by Harvard’s Noam Wasserman, a masterpiece of research on entrepreneurs over a ten-year period.
4. Your mate (spouse or otherwise) must support your intention to start a business (emotionally).
This includes your mate being aware and accepting of the amount of time you’ll be devoting to the business and the financial risk. Opposition by a reluctant mate spells doom for any innovative business or doom for the relationship.
5. You should have sufficient financial resources to take care of your mate and dependents for at least two (yes two) years after you quit your day-job, EVEN IF YOU PLAN ON RAISING CAPITAL
Investors (generally) will insist on your spending their cash on the business, not on yourself or family. Also, it may take much longer than you expect to raise any such capital. Please do not imagine that raising capital will solve your personal financial problems. (It won’t. It may create worse problems.)
6, You must have sufficient financial resources to get the business started, either from your own savings or income or from friends or family.
This means you have enough financial resources to last until you can raise outside capital and then some. The amount of time it will take to raise outside capital (from people who don’t know you well) is at least twice as long as you may think, so plan ahead. If you want some help thinking this through for your particular business idea, contact me through the Connect page on this website.
7. Either you or your partner has some experience running a business
Not actually essential, but highly useful. Starting an innovative business is one of the most difficult projects a human being can attempt, on par with fighting a war, running for political office, or getting married.
Essential Personal Factors
These are the personal traits that you (as founder) together with your founding partner should exhibit or acquire. This list is provided by the Gallup Organization, who surveyed 2500 entrepreneurs and published the results in the Gallop Business Journal, May 6, 2014 and detailed in their book Entrepreneurial StrengthsFinder (Gallup Press, September 2014).
– Confidence: You accurately know yourself and understand others
– Creative Thinker: You exhibit creativity in taking an existing idea or product and turning it into something better
– Delegator: You recognize that you cannot do everything and are willing to contemplate a shift in style and control
– Determination: You persevere through difficult, even seemingly insurmountable, obstacles
– Independent: You are prepared to do whatever needs to be done to build a successful venture
– Knowledge-Seeker: You constantly search for information that is relevant to growing your business
– Promoter: You are the best spokesperson for the business
– Relationship-Builder: You have high social awareness and an ability to build relationships that are beneficial for the firm’s survival and growth
– Risk-Taker: You instinctively know how to manage high-risk situations.
From my experience, there’s one additional trait that is key:
– Flexibility: You are constantly adapting and pivoting to make the business successful, not getting hung up on one approach
There may be other such traits that this list misses, and there is certainly much to say about each trait – such as what it means and how to master it. Let me suggest before you launch an innovative business that you do some additional reading on this subject. Then look at yourself as an investor would look at you and ask, “Am I ready?” Better yet, ask your colleagues or experienced investors and coaches to assess your readiness if there is any doubt.
The purpose of this post is to direct away those that are not ready to start an innovative business and encourage those who are. Be sure you want to start an innovative business, not just a business both to increase your financial success and personal satisfaction. Next, check your motivations. If they are among the “good” ones, then make sure you have ALL the essential factors for a reasonable shot at success, including the personal traits. Ask a coach or angel investor to help you evaluate the essential factors and your personal traits. If you lack one or more of the personal traits, make sure your founding partner can compensate and you’re willing to let them do so. If you are not sure about one or more of these factors, then a better resolution would be to: “THIS YEAR, I’ll make preparations for starting an innovative business, and consider actually starting it NEXT year.”
In part three of “So You are Going to Start Up a Business in 2016”, we will talk about…How to Get to Yes or No