The Passion of the Entrepreneur

27 11 2009

A few weeks ago the Tech Coast Angels of Orange County (www.techcoastangels.com)- a group to which I belong- held an open meeting which enabled would-be entrepreneurs to meet with about a half dozen of us angels.   We expected about 30 people to show up, yet we would up with more than 70 entrepreneurs attending.   Ray Chan and Stu Roberts of our group did a superlative job of arranging the meeting.

The entrepreneurs were very engaging and had extreme passion.  Recognizing that we were looking for great opportunities in which to invest, the entrepreneurs tried to sell us on their ideas and how great they were.  They become enamored with their ideas and the technologies.   And it is great to have that much passion.  But passion without the true understanding of the market and making money is misplaced.  Therefore, we, angels, spent time explaining how to make their pitch stronger.

To each entrepreneur, I explained that there are fundamentally four main questions that I need to understand and therefore they have to address each area. 

  1. Is there a market?  To whom are you trying to sell and can you pinpoint and find the actual buyers of the product or service?
  2. Can you make it?   How is the product made and do you have to use a new process and/or new technology?  Patent protection is great to have, yet that is not sufficient to make a product a business success.
  3. Can you make money?  Angels want a return on their investment over a relatively short period of time.  Very few projects result in a 10x or higher return on investment and many angel investments may languish or worse.  The entrepreneur must understand how money is made- the routes to revenue early in the product lifecycle, and at least a preliminary view of how other products or line extensions can be developed.   I was amazed that the entrepreneurs were so focused on their technology and product that many failed to see the advantage of partnering with others in a broader eco-system.  As an angel, I felt it was our obligation to help them see that aspect of business.
  4. Can you support it?  What happens after the product is in the market?  If it is a consumer product specifically, how is the entrepreneur going to support it? Is there a call center or will the entrepreneur handle the calls him/herself?  And what happens after the initial product is in the market?  How will it be extended to uncover new opportunities in the market?

I am on the Advisory Board of a couple of startups as I also look for a corporate C-level opportunity.  One startup company in which I am involved has developed a patented technology to make mail boxes “smart.”  As I reviewed the business plan and considered my involvement in the company, I was looking for the answers to the four questions cited above.  Based on what I read and what I could add, I decided to join the advisory board and am very excited about their prospects.

I can see the market and the person to whom I would sell the product.  I understand the patent and see how it can be made today, tomorrow, and extensible to products in the future.  I understand the financials although with such a large market we have to be careful not to let the “law of large numbers” distort the reality of the market.  So we started to review the financials top down and correlated with the market sizing from the bottom up.   And finally, I could see how we can support the product today and in the future.   When I put it all together, I see a high probability of success as an investment and as a successful company long term, notwithstanding any exit. 

I am glad to hear your thoughts.

I trust all had a good Thanksgiving and wish all my readers a healthy and happy holiday season.

David

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