3 Basic Questions Entrepreneurs Get Wrong
Albeit, I am a neophyte to the investing scene, but have quickly learned that investors ask fairly repetitive questions to address obvious concerns. In turn, the answers received start sounding similar as well. A couple questions that startups frequently struggle with (or, more importantly, think they have good answers to, but usually aren’t compelling):
(there aren’t necessarily wrong or right answers, but worse and better answers – of course these can shift depending on the industry, business, etc.)
Question 1: Addressable Market Size?
What’s being asked: If you sold your product to everyone in your target market (at the proposed prices), what would your annual revenue be?
Key: It does not have to be exact – order of magnitude is almost close enough.
- “I don’t know” – do your research! We expect you to be close to an expert in your space
- # people, # companies, # transactions, etc. in the space – these are metrics that help build to an addressable market size, not the final answer
- Industry spending numbers – “$200B spent on enterprise IT solutions”…these numbers are easy to find, and way to broad. Define exactly what you do and calculate only that part.
- “It’s huge, definitely over a Billion” – yes, it’s well published that VCs are seeking companies in $xB dollar markets, but unjustified, approximate numbers are a sign that you don’t know the space (see #1)
- “$2.37Trillion dollars” – Do a sanity check, if your number is larger than the GDP of most industrialized nations, Houston, we have a problem
- “10M”– hinted at before, if your addressable market is really this small, then it is probably not a relevant venture opportunity unless it is growing at over 1000% per year
- “We’re addressing a ~$2.5B market, let me quickly take you through the math and share my (multiple, reputable) sources that support this estimate”
- “There are three incumbents in this exact space, and their aggregate revenue is around $5B”
Question 2: Sustainable competitive advantage?
What’s being asked: How do you un-level the playing field, for the next ~3-5 years?
Key: it is a question about today – what are you holding that is special
- First mover – a quick copier often can get more things right and learn from your mistakes, little advantage here except in very specific industries cases
- Network effect & traction – besides the fact these are often unsustainable, you can’t cite things that you don’t currently have. “We will have a lot of users and they won’t want to switch” is not an advantage until you get those users. Don’t confuse switching costs with competitive advantages.
- Software IP – possibly a controversial statement, but generally considered not sustainable, as most software patents are fairly easy to work around
- Vital, exclusive partnerships with the major customers/suppliers/partners that constitute a significant % of the space
- Access to proprietary information/data that others won’t be able to gain
- Hard to replicate technology at the core of the business
- An incredibly difficult problem that your team is uniquely qualified to solve (you have guy that built the only working quantum computer)
What’s being asked: Who will fight you for anything you need to transact business
Key: Don’t focus on today but over the next 3-5 years, especially once you grow to a decent size. Other startups at the same and/or earlier stage as yours should be mentioned, but not usually our chief concern.
- We don’t have any – Most probably wrong, sure you know the space? Besides, no competition might also indicate that this is not an interesting or profitable space. Don’t forget what folks are doing today to address the need.
- “(insert large, existing player) won’t move into this space because they are focused on their core business” – might be true, but thousands of entrepreneurs said that about Google and social and now local… These players are not dumb and capitalists – they’ll go after where the money is, sure some through acquisitions, but usually a small number for a given space. What happens when you get some traction and show this is a great space?
- “Let me walk you through the players in this space that have me most concerned and tell you how we stack up on these key dimensions.”
- “Given the looming threat of (x big player) entering, here is our strategy to continue to stay 3 steps ahead”
Posted on July 26, 2011, in Venture & Start-ups. Bookmark the permalink. Leave a comment.
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