A few weeks ago, I spent some time at a networking event for entrepreneurs. First time I had formally “networked” in years – I normally detest networking events, since they’re usually 100% full of consultants looking for clients.
In other words, a networking event is the business equivalent of a nightclub filled with men.
On second thought, that might be awesome for some people. Especially in Sydney. Who am I to judge?
Point is, by the end of the evening I was ready to stab my eyeballs out with the nearest piece of cutlery. Here’s why…
I was attending this event spontaneously, invited by a friend – so I approached it with no agenda. I wasn’t looking for anything. Instead of pitching people myself, I spent the evening hearing the elevator speeches of dozens of achingly hot, web 2.0 startups.
About twenty minutes after arriving, a realization struck me. Like lightning. I was in a room filled with Ideas People.
I knew it when the third person I spoke to started telling me the same story. Something about their website that’d connect up amazing people with the stuff they need. All with extra awesomeness and synergy!
A few questions quickly revealed that the website hadn’t yet been built. They were looking for Angel Investors to get that “hard part” sorted out.
The website sounded like it’d theoretically be quite a smart idea. I asked the number one question all prospect investors ask: “What’s the go-to-market strategy?”
I received a blank stare. My heart sank.
Why ideas really do suck
I’ve met a lot of wannabe entrepreneurs – amazingly talented people bursting with ambition, hope and motivational vigor. They’re awesome and I love them dearly.
But their ideas suck… even when they’re great ideas.
The thing about business is that no business is built on a great idea alone. Businesses are built on great ideas coupled with smart go-to-market strategy.
You’ll hear this same concept described as:
- The revenue strategy
- The profit model
- The sales funnel
- The “up-side”
Most of those terms are interchangeable pieces of business jargon, but they’re crucial to turning great ideas into fully fledged businesses.
The bubbles of silicon valley and the media hype that surround them are largely to blame. Revolutionary businesses that launched without a profit model to secure millions in funding have whet the appetites of this generation of eager entrepreneurs.
The story of Mark Zuckerberg, as told by Aaron Sorkin’s The Social Network, has brought this hype to unprecedented levels. Mark is billed as the world’s youngest billionaire, based on the “market valuation” of his equity in Facebook … and despite the fact that the business only scraped it’s way to cash-flow positive status in September 2009.
The movie doesn’t tell us that Facebook announced only $550 million in revenue. Expenses (and therefor, margin) are kept on the down-low, since the company isn’t required to publicly disclose it’s financials.
This is what the wannabes don’t understand. Businesses like Facebook, for all their lofty market valuations and “billionaire” labels, may not ever actually translate all that potential money into real money. We’re still waiting to see what happens with Twitter – again, valued at billions, making nothing.
Compare these to the non-web businesses that had to do things the old fashioned way. Richard Branson sold Virgin Music to EMI for five hundred million british pounds. That’s not a valuation – they wrote him a cheque!
His business was a fully fledged, profitable empire. Not a costly website with millions of users paying nothing… and certainly not just an idea.
Most wannabe entrepreneurs don’t have a profit model. They believe that their “great idea” is enough to make them wealthy and famous like Zuckerberg.
That’s why Great Ideas really do suck – they’re dangerous! They ensnare the imagination of entrepreneurs and have them believe that they can bend (or break!) the rules of business, because of the specialness and cutting-edge’ness of their great idea.
A Great Idea is only great if it has a profit model to match
If not, your idea is worthless. Every single successful business, even the sexy web 2.0 ones, is built on a foundation of solid, profitable sales and marketing.
Plus incredibly hard work. Plus connections with the right people. Plus a healthy dose of good luck. But you can short cut all of those if you can just create profit.
Every successful business can demonstrate why investors can feed money in one end and pump more money out the other end.
The networking group I had stumbled upon was full of entrepreneurs chasing the Angel Investor dream – hoping that their idea would be recognized as “great” enough that someone would give them a handful of cash to get up and running.
Every person I spoke to had no clue how to demonstrate the Return on Investment an Angel might receive. They couldn’t describe a sales funnel that’d create a profit margin.
All they could think about was their idea. Their eyes were bright – their faces quivering with excitement.
7 factors that investors look for (and why you should care)
Entrepreneurs are people who make ideas real. They take dreams and turn them into empires. Or, they try to. Many entrepreneurs don’t make it.
Very often, an entrepreneur requires an injection of cash to get their idea off the ground. There’s nothing wrong with this – there is a lot to be said for bootstrapping your way to the top, but sometimes you need big resources to achieve big things.
If you need big cash you need big investors. These are people, typically experienced entrepreneurs or business people themselves, who specialize in providing seed funding to entrepreneurs with “great ideas”.
Most of these “Angel Investors” offer more than just cash – they can (and typically will) offer huge value by mentoring and guiding the businesses they invest in. Often it is this input that is more valuable than the investment capital itself.
Angel investors don’t just throw down investment dollars on every idea they hear, they have a specific set of criteria they look for. Each investor has a different style, but some basics are always mandatory. This list is compiled from my experience working with investor clients and as a start-up investor myself:
- An action-taking track record – Evidence that you’re a “do-er” not just a dreamer.
- Some financial security – Starting out with the basics (shelter, food, etc) sorted is a good sign you’ve got it together and could be going somewhere. Who invests in a bum?
- Work experience in relevant industries – Want to start a restaurant? Working in hospitality first is a good move.
- Leadership skills – If your business is one that needs funding, it’s probably going to require staff. Investors know that leadership makes (or breaks) the biz.
- Sales skills – Because every business requires the owner/operator to pitch, at some point. The people who are ace at this tend to do the best.
- Ruthless do-whatever-it-takes passion – An investor can’t afford for you to be indifferent when it comes to the crunch. Do you have the passion that’ll fuel your business’s growth?
- Profit forecasts – Realistic, conservative and with as few assumptions as possible.
Even if you’re not looking for investors, checking off every item on this list will make your business investor-worthy. It’s the short-cut to success, minus the short cut. The pay off? As always, you win more freedom, wealth and impact.
What do you think? Is your business in the position where an Angel investor would/could throw some cash your way to help it grow? Why/Why not?