Follow the money

As a startup adviser/angel and board director, I spend a lot of time talking to entrepreneurs and founders about their ideas and business strategy, and one of the most common advice I find myself giving is: follow the money

This would seem obvious enough, but sometimes common sense is less common than we expect. Many founders are “engineering types”, who by their nature are problem solvers. They have an idea and passion on “how to create something cool and innovative or solve some perceived problem in a better way” and that singularly drives their path forward. On the surface, there is nothing wrong with this and in fact, this focus is their advantage to innovating quickly.

However, if you are going to build a successful business based on this innovation, there is a critical step, which doesn’t always get enough focus in the early excitement: “who (and why) will someone pay for this”. I am sure you can find examples that didn’t evolve this way, but in general, if you can’t really prove out why someone will pay for your “product/solution” it will be hard to sustain it (or even fund it from day one).

There are many great ideas, but not every great idea or innovation can be monetized with reasonable effort and timeframe to deliver a good return on investment. (Btw the inverse is not always true). An idea could be brilliant, but it may not be possible to build a business around it. Don’t let survivorship bias fool you, the world is of full of great ideas that failed to turn into a real business. It is just that we always hear about the ones that succeeded. Most ideas fail to turn into a sustainable business, not because founders are bad, or the team can’t execute, but rather because they couldn’t figure out a way to monetize (profitably at some point). When you are in a situation like this, you end up “pushing on a string” trying to find a way to extract value… and that is not fun.

So how do you make sure you don’t fall into this trap. Well here are some good questions to think about. There is nothing radically new here (for all you serial entrepreneurs..), but sometimes remembering the basics is important.

  1. Pay — Would someone pay for a solution to the problem I am solving. It doesn’t have to be direct (i.e. Google doesn’t charge users, it changes advertisers, but some value needs to be created that someone is willing to pay for). Remember, people pay for “value to them”, not technology. The technology may be amazing and exciting, but if you are not delivering some tangible value to them (in their mind), they won’t pay for it.
  2. Priority — Are you solving a “top 3” problem. This is especially important in the enterprise space. Everyone is busy, so even if you have something “interesting” unless it is one of the top 3 things the customer is focused on right now, it’s unlikely to get much attention, and you will be stuck “waiting for them to get to it”.
  3. Profit — Can you provide this solution profitably (long term…but not in decades). You can’t make it up in volume or eyeballs or downloads forever. At some point, every business needs to be profitable, or at least break even. Differing businesses have different timelines, but there at least has to be a thesis that shows how this will happen. Acquiring paying customers is generally hard, so you need to really think this through because you can’t spend a $1 to make 50 cents forever. Related to this is also market size, if the market size is small or fragmented and/or expanding it is very expensive, this will have a big impact on your potential for future profits.
  4. Someone’s lunch — Whose lunch am I eating. Specifically, the dollars that I am going to get from the customer, where are they being spent now (ex. Uber/Taxi). It is, of course, possible to create a whole new category (video games for example) but in general you are going to be taking dollars that were previously spent elsewhere. Thus, it would be good to know where they are spent today. If you can’t find whose lunch you are eating, you better be doubly sure people are willing to find new dollars in their wallet to pay for your product/service
  5. Why me — why will they choose my widget/solution vs. alternatives, and is the differentiation sustainable. Let’s assume people are willing to pay. Why will they pay you vs. someone else? What is your “unfair” advantage — Btw this doesn’t have to be technology, for big companies, this could be their channel or brand, but you need something that passes the sniff test and you need a thesis on how you can sustain it.
  6. Ecosystem — What else is needed for the customer to use your solution effectively. You may have a great “widget”, but it might need a whole ecosystem to be useful. How will that ecosystem come to exist (in a timely fashion)? Many businesses have failed because they starved waiting for the ecosystem to get built. Figure out what else needs to exist for your solution to be used. I.e. Netflix streaming (fast Internet). Of course, you can help build the ecosystem, but that is yet another dependency, and it will take time and money. So you at the very least you need to be explicitly aware of that dependency.

Now, it’s unlikely you will have complete answers to all of these, but you should have a theory that you can go out and test for each one and see how you measure up. This on its own will not guarantee you can build a successful business from your idea, but it will help you identify and frame many of your external dependencies up front. The external parts are the hardest to address later on, so getting them right from the start can be the difference between an idea and a real business.

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