Entrepreneur Office Hours - Issue #33
My biggest mistake before launching a startup and the biggest myth in entrepreneurship
You probably haven’t spent much time staring at my Medium bio. In fact, it’d be weird if you have. So I’m going to highlight the important part of it here:
“I write about the mistakes entrepreneurs make since I’ve made plenty.”
That sentence sums up my approach to teaching entrepreneurship. Basically, I’ve screwed up… a ton. Rather than hiding those mistakes, I’ve decided to share them with the world in the hopes that maybe someone else can benefit from my screwups.
That’s the core of this week’s issue. I’m sharing more of the stupid mistakes I’ve made — fundraising mistakes and launch mistakes and business model mistakes. Hopefully my stories help you avoid doing the same stupid things. And, if they don’t, that’s OK, too. Entrepreneurship is hard. You’re going to make lots of mistakes.
The important thing is that you don’t wallow in your screwups. Learn from them and move forward. Easier said than done, I know, but it’s the key to entrepreneurial success.
When I launched my first company, I thought I knew everything I needed to know about businesses, and, what I didn’t know, I was smart enough to figure out on my own. To some extent, I suppose that was true, but it was also a really inefficient (and stupid!) approach to building startups.
The Harvard Student Who Connected People from His Dorm
Have you heard about the Harvard undergrad who launched a business from his dorm room that allowed people to connect with other people around the world using computers? No, I’m not referring to Mark Zuckerberg. Four decades earlier, another Harvard undergrad named Jeff Tarr did pretty much the same thing when he started a company called Operation Match. It was the world’s first computer dating service.
Get the full story on this week’s episode of Web Masters. Listen now on:
…or search “Web Masters” wherever you listen to your favorite podcasts.
Every entrepreneur dreams of building a "passive income" business. There's only one problem: passive income doesn't exist. It's a myth. Are you fooling yourself into chasing it? If so... be warned... you're wasting your time...
Lots of entrepreneurs struggle with finding “great ideas” for new businesses, but it’s actually a fairly straightforward process. In fact, most successful entrepreneurs follow the same strategy (even if they don’t always realize it!).
Office Hours Q&A
I have a fundraising question for you. My team and I have been building our technology (AI data processing) for about two years now. We’ve got a fully functional prototype and some provisional patents already filed to protect our IP. We think we’re ready to launch the actual business and so now we need some funding to build out our sales and marketing team and that kind of stuff.
What kinds of investors should we be approaching at this point? Would you recommend angels? Or venture capitalists? And what “stage” are we considered since we have a working product that’s ready for market?
Thank you for your help!
I’m about to make a blanket statement that, I realize, isn’t 100% true. I’ll circle back with the caveats after, but let me start with the statement:
Investors don’t invest in technologies. They invest in businesses.
What you’ve described in your question is a group of people who have spent the past couple of years building a technology. There’s nothing wrong with that in and of itself. After all, new technologies have to get developed, and that takes time. But a technology isn’t a business, and this is where you’re going to run into problems with fundraising.
Investors understand that technologies -- even incredible technologies -- don’t matter in relation to the purpose of venture capital. By that I mean the purpose of venture capital is to provide financial resources that accelerate the growth of a business model so a given business can scale to the point where it can “exit” and return money on the original investment. In that context, a technology without a business model behind it doesn’t prove anything to investors because they won’t have any evidence the market is willing to adopt something new. Without evidence of market adoption, there’s no business, no potential for an exit, and no reason to invest.
By those standards -- and those standards alone -- what you’ve described in your question means you have nothing that would interest investors. You’re basically at Stage Zero.
Based on your question, you want to raise capital in order to start building the business model around your technology. But fundraising actually works in reverse. You need to build and prove a business model for your technology, and, once you begin having evidence of a successful business model (i.e. market adoption), that’s when you’ll go to investors and try to make the case that their money can accelerate your growth.
In other words, trying to raise money now would be a waste of your time and resources. You shouldn’t be trying to raise capital to build sales and marketing infrastructure. You and/or your co-founders need to be the first people doing all the sales and marketing in order to prove a viable business model. In fact, and in general, the founders should always be the first sales people in any business.
I realize sales/marketing might be outside your comfort zone. I totally get it. Sales and customer acquisition was completely outside my comfort zone when I first started building startups, too. I was a tech guy focused on building cool stuff, and, because of that, my first companies failed.
I didn’t start succeeding until I learned that I had to be the first salesperson. It was difficult and uncomfortable work, but it was also necessary because it’s what enabled me to prove a viable business model that investors would want to invest in.
Your question makes me think you’re in the same position. It’s not time for you to fundraise. It’s time for you to start building your business. That means you need to begin selling what you’ve built and, in the process, figure out a repeatable, predictable, scalable customer acquisition strategy. Once you’ve got evidence about what it takes to get customers, present that evidence to investors and see if they’re interested in helping you scale.
Oh… and about those caveats I mentioned at the beginning. Some types of companies are, indeed, tech-first. They require lots of investment in the technology before a business can be built around it. Examples are things like medical devices and pharmaceuticals. However, those tend to be the exception rather than the norm. Based on what you’ve written, it seems like you’ve got a technology that was buildable without investment. Because of that, and since you certainly don’t need investor capital to do initial sales, it sounds like the only thing stopping you from launching the business is the misconception that you need someone else to launch your business. But, if you want to be an entrepreneur, that’s not true. The best person to launch your business is you. Good luck!
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!