So You Want to be an Entrepreneur

So you think you have an idea for the new "killer app". Or perhaps you are sick and tired of the corporate grind. Maybe the allure of running your own business, being the master of your own destiny, is attractive. And let's not forget the potential financial upside, financial freedom forever. Whatever the motivation may be, it appears that many people today are anxious to take the plunge into starting and running their own businesses. However, there is an adage that says for every great idea that succeeds, there are at least a hundred that must fail.

As principals of a firm that provides venture capital, management consulting and investment banking services to emerging technology companies, we take exception to this adage. We believe that while the success of a business has many dimensions, there are some very simple and basic areas that can be addressed in order to improve the likelihood of success. That said, we could name a multitude of companies that are successful, but would have failed our litmus test. However, we will share our criteria nevertheless, in the hope that there may be an aspiring entrepreneur out there that follows our advice and becomes the next Bill Gates (hopefully with our firm assisting).

Question 1: What is the value proposition of the business? An apparently straightforward question; we wish we had a dollar for the each time that the answer becomes a thirty minute monologue on a product's features and functions. We even had one owner of a company tell us that his value proposition was to earn enough so that he could pay off his mortgage, send all of his children to college, and buy a retirement home in Florida. Value means: what makes this concept attractive to others? What makes it compelling? What are the benefits? Is a problem being solved or is the business creating a new need? Is this a niche play or does it have a potential global impact? Is it faster, cheaper, smarter, better, more powerful, or of higher aesthetic value? Does the concept have perishability or can it evolve as the world changes? How does your value proposition stack up against both real and/or perceived competitors?

Question 2: What kind of opportunity does this value proposition provide? From an economic perspective, the opportunity has to have the ability not only to be financially rewarding but also to be flexible enough to support a valid economic model operating under constantly changing market conditions. We recently had a meeting with a company that was interested in exploring a roll-up strategy in their industry. The company wanted to pursue this strategy based upon the stories they had read of the personal wealth created by other industry roll-ups. What they failed to realize was that their industry is relatively new, is still developing, is relatively small, and consequently, is not yet on Wall Streets' radar screen. Instead of worrying about short-term personal wealth, their focus should be on creating greater value for customers to stimulate greater market acceptance of their service. The lesson learned: know your market. The odds are against you becoming a $100 million company in an industry that only does $50 million in sales.

Question 3: Is the right team in place to take advantage of the opportunity? When evaluating a company, the first question we ask ourselves is whether the team has prior relevant business experience. There is also the question of what the founder brings to the table in terms of leadership, vision, energy, and determination. We met one founder of a technology company who was more interested in finding a conference room table at a good price than doing the hard work of getting a prototype product ready for beta testing. In our travels, we meet a lot of very smart and creative technologists with very intriguing ideas but they donât belong running a company. That said, there are a lot of great technologists who do a great job at running a business. One qualifying question we ask to the CEO who is also the chief technologist is "If we gave you $5 million in financing with the condition that we bring in another CEO and you become the CTO, would you agree?" If the answer is "no", more often than not, we run in the opposite direction. It's not that we want to throw the founder out, we want to understand his or her ego and flexibility. Understand what your teams' strengths and weaknesses are and don't be afraid to bring in expertise where it can add immediate value as well as fill gaps in the business proposition. When starting up another business several years ago, a potential investor offered the following words of wisdom, "If you have an 'A' team and only a 'C' concept, the team will figure out how to get at least a 'B'. If you have a 'C' team and an 'A' concept, the best that you can hope for is a 'C'."

Question 4: What is the teams' level of commitment? Is management paying themselves big salaries? Are the offices located in class 'A' prime real estate? Does the CEO talk about deploying resources in only value-add ways? We had one client that thought he could raise $3 to $5 million of financing even though he was still working full-time for another company. Our question to him was "what kind of commitment do you think that shows to potential investors?" However, this is the chicken and egg question. Do you quit your day job to devote full time and energy to the venture to demonstrate commitment before funding is in or do you get funding first? Insight into the answer to this can be found in question 6. It is also important to recognize that many investors insist that the management team have personal equity in the business.

Question 5: Does the team know how to bring the concept to market? So the team is in place, a prototype has been developed and it is in beta with several customers. Can we see the sales and marketing plan? Public relations is great for creating awareness, but who are your customers and how are you going to reach them? Direct Marketing? Telesales? Outbound Sales? Sales agents? Distribution? We met with one company recently whose sales plan was solely an agent relationship with one significant OEM. While not being very comfortable with a single sales outlet, our concern was heightened when we learned that the OEM has plans to develop a competitive offering. Proper planning also involves giving as much thought to where your 1,000th sale is going to come from as your 10th sale.

Question 6: Can the venture get financing and how much? We meet a lot of aspiring entrepreneurs today that think a business plan and the ability to throw the right buzzwords out will get them $5 to $10 million in funding. If the enterprise can answer Questions 1 through 6 credibly, there is a good chance that the concept is fundable. However, every entrepreneur should understand that the amount of funding that they receive is directly proportional to the stage of their business. Our firm uses a simple measurement system as a starting point to define value: if an idea is worth $1 million, then a prototype is worth $5 million and a going business is worth five times that. Valuation is a much more complicated concept than this, but one has to start somewhere. Another key question to ask is: what is the investment return? Today's VCs typically are looking for a 40 to 60 percent IRR across their portfolios. Because they have some big losers, they need to see how your concept could be a big winner. It is also important to recognize that VCs are not the only source of funding, especially given the many stages of a business. Of the $130 billion or so that goes into new start-ups each year, only about $16 billion of this amount comes from VC funds. Additional sources, particularly for early stage funding, include personal savings, friends, family, wealthy professionals and retired entrepreneurs (angels), strategic investors, government organizations and sometimes even suppliers and customers.

Question 7: Does the company get leverage from outside advisors? The role that outside resources can play is just as critical to the success of the venture as the quality of the team. No new venture can afford to hire the perfect management team right out of the gate. Advisors can often fill gaps on the team, perhaps in an interim role, and can contribute significantly during the development of strategic and tactical plans. Don't pad your Board of Directors or Advisors with yes-men. Only add people whose advice and counsel will add-value and make sure that you minimize redundancy of advice. Figure out what are the critical areas that your business needs to do well to be successful and add people to your board that have a lot of knowledge in these areas. Often times this advice can come at no cost or very low cost. Most of the major law firms and big six accountants are more than willing to offer start-up companies significant discounts in the early stages in the hope that they will have your business for the long-term.

Question 8: Does the business plan effectively communicate the value proposition and opportunity for the business? A lot of bad business plans have crossed our desks and it is a shame, because this is often times the only impression that one gets of a company. Like most other folks that do what we do, the executive summary gets read first, then we flip to the management team biographies and if we haven't become bored, we take a look at the financial projections. There is the right way and wrong way to develop a business plan and that could be an article in itself. Our advice: get experienced help to make sure that the business plan reflects the quality of the opportunity.

Putting it all into perspective, these eight questions really revolve around three major areas: the founders/team, the opportunity, and the resources required to ensure success. A comprehensive and honest self-examination of one's business, be it a start-up or otherwise, will help identify the gaps that exist to ensure success. Before you quit your day job, ask yourself these eight simple questions.

Howard A. Samuels is a Managing Director of The Mercator Group, a Boston-based management consulting company that offers a range of business advisory services to emerging and middle market technology companies.