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?
42 Comments+ Add Comment
I receive a ton of requests from people online who want me to promote their stuff, help them out, invest my time, maybe provide some services free of charge. In short, they want a bit of angel investment from me.
Here are a few reasons I consistently turn people down:
1. I have no idea who they are. Would you walk up to a stranger on the street and ask them for their time or money?
2. There’s nothing in it for me besides appearing benevolent and generous. If I’m going to invest in a project in any way, shape or form, you can be sure I want something back from it.
3. I’ve never heard of them. They have this great idea, but they have no qualifications, credentials or anything of the sort to make me take them seriously as a credible expert.
4. Few know demand. They have this idea, but have no idea if it’s needed, if it’s been done already (40 times), if people would buy it, etc.
5. They have stupid promotion ideas – or worse, none.
So… don’t make these mistakes, in short. Show me you’ve done your homework and have something really good that will make me WANT to invest, and that will bring me ROI.
This comment just doubled the value of this post. Thanks James – remarkably insightful stuff!
Just retweeted this post purely for the line, “In other words, a networking event is the business equivalent of a nightclub filled with men.”
Thanks Peter, I love reading your column.
haha thanks Marc! Glad that phrase clicked with you 😛
Savvying up the world, one step at a time.
What a couple you two make 😀
Haha dream on. I’m taken! (James is female, for those of you struggling to make sense of Martin’s hilarious jokes)
Ah! Maybe there still is hope for me then…. Eh James? Coffee?
â€œIn other words, a networking event is the business equivalent of a nightclub filled with men.â€
You say that like its a bad thing! Depending on your perspective, there are LOTS of ways that could be an extraordinarily successful event. But then, I am regularly accused of being a “glass-half-full” kind of gal.
Speaking of the glass (more than) half full, thanks, Peter, AND James….for clarifying how many of these qualities are already mine. I’ll let you know when I’m ready to rock some angels.
I guess I was writing from a subjective point of view – one man’s unfortunate nightclub experience is another gal’s dream, i guess 😛
*Bites tongue and successfully makes no hilarious joke*
No sorry, I’m afraid you failed miserably at not being funny…
Good article, Peter. Ideas are cheap, implementation is hard, and making money is the point!
I got an email just last week from a friend telling me his great idea for an application, and to be sure he “got his cut” after I did all the work. There’s three lessons in this:
1) Three versions of the application already exist; this was a great idea about 7 years ago – no market research was done. Ideas are great, but do the market research to see if (a) anyone cares and (b) you’re reinventing something.
2) Most people don’t have a clue how much effort is required to get an application from concept to market. This particular idea was a small app, and with some generous assumptions would only take an expert in the field (assuming one was available) a couple of hundred hours to produce a basic version. So the initial development cost would be around $20K, assuming everything went right. And it never does.
3) No thought was given on how to market the app, which would arguably appeal to families sharing a single home system. And how many of those are there now? In the computer-using families that I know, everyone has their own computer. So they’d have no need for the app.
“Ideas People”, a little research will save you a lot of heartache! Check out the competition, profile the market, sketch the implementation, and then if it’s still a winner go build a team to make it happen.
Thanks for this comment Steven – it’s a perfect example of what I’m talking about. Ideas and talk are cheap. Having the real world know-how to turn an idea into something is the important (and rare) skill.
I actually know this guy who’s great at good ideas. But he never ever bothers to work for them. Instead, he tells someone about it and then expects to get paid. For an idea???
Well, hereâ€™s the thing: â€œHe expects to get paid.â€
Does he actually see cash for his ideas? Or does he think the world owes him for it? If 1, then itâ€™s called consulting, and thatâ€™s a viable business. If itâ€™s 2, then itâ€™s just ego 🙂
Apologies for the comment posting as Peter (for those who received that). This is what happens when you do backend work on a site and forget to log out before commenting. Oy!
Never. He shares the idea, expects another to work his or her ass off, and expects big money for just the idea.
And it’s not like they are revolutionary ideas either. Just, you know… good ones and with a lot of potential. Dime/dozen stuff.
I love talking about networking, mainly because these events are not about networking. People walk around like zombies saying, “what do you do?” Who came up with such a lame idea? most everyone feels uncomfortable vomiting their whats on to people.
It’s like getting married without dating. Got a different approach that works quite well.
Good piece on profit models. Thx, G.
I totally agree with you on this Giulietta – do you have a different approach that you’ve witnessed working?
Personally, I’m a big believer in never eating alone. Taking business/network contacts to lunch for a chat about the challenges they face is a surefire way to build relationships of VALUE. It costs more, but it pays more too 😉
Fantastic post! As a lawyer dealing with IT and intellectual property, I see more than my fair share of ideas people. They’re vibrant, innovative, and I love meeting them. But it’s hard to introduce a dose of reality without dousing that passion!
Like the guy who came to see me with a business idea ‘worth at least a million dollars’. It was a pun that could be used as a name for a business.
Yep, that was it.
There was no business, no staff, no customers, no assets, no plan… just the name. A name so memorable I can’t remember what it was. And he was firmly convinced he could sell that name for a million dollars (but didn’t want to spend a few bucks to even register a trade mark to protect it).
Over the years, I’ve seen way too many start-ups sink without a trace because of a lack of good foundations.
Sure, I’ll readily admit lawyers and accountants etc can be too conservative. But start-ups give themselves a better chance of success if they heed advice instead of doggedly dismissing their professional advisors as ‘naysayers’ or ‘negative energy’, without thinking it through with a cool head.
Wow Kay – that’s a perfect example of the downright scary naivety of some of the dreamers out there. I know what it’s like to want to ignore the conservative criticisms of lawyers and accountants… but sometimes the act of striving to sell your idea to such people is a very valuable exercise. It forces you to *realize* your dream.
As both a failed entrepreneur and a failed bureaucrat living in DC, I gathered a few lessons learned over the past two decades. Some of these challenge conventional thinking, others affirm it. This piece is interesting to me because on one hand, Peter is spot-on and incredibly insightful regarding the starry-eyed thinking of youthful idealism (entrepreneurs, alas, remain young at heart). However, I interpret his “rant” (great style, would like to see more) as a move from the conventional thinking of new entrepreneurs to that of the cynical investor. Let’s not forget that the purpose of organization is to create value. But value need not be operational… transformative value – the type that gets us blogging at 3am – depends on changing society’s behavior, not simply catering to it’s needs. That’s what makes a difference, and why the stars exist and should always be encouraged to shine brightly.
Is that a hard call for an investor? Absolutely. But your manhood is your problem, not mine, says the ideas guy. As men (and women who behave like men), we are genetically predisposed to risk and challenge. No risk, no reward. So suck it up and get the economy going, guys. Ideas guys, create new theories of value. Investors, test the theory in practice. If you lose, you’ve paid tuition. That’s my rant. Stay positive. Cheers.
Hey Michael, thanks for sharing this fantastic comment.
I think your interpretation is spot on – this article is basically my call for entrepreneurs to think and act in a more investor-centric way. The ideas guys (as you call them) can enjoy a fast track to success by working hard to expand their ideas into effective business models, rather than measuring their validity by the amount of hype they produce.
“rather than measuring their validity by the amount of hype they produce.”
*sigh of relief*
Web 3.0 has arrived 🙂
One man’s hype is another man’s vision.
With all due respect to both Peter and Martin, this is why more good ideas don’t see the light of day – with technology changing faster and faster, along with the competitive pressures of globalization, business models simply don’t work like they used to. There is simply less economic friction to exploit. Anymore, business plans are a security blanket that get picked apart by financial analysts (and who wants a CFO to run things?) or tossed out the window next week when something changes.
The solution to this acrimonious dance is to change the dance. Refocus efforts and evaluations not on planning but on stakeholder relations, attracting talent and intellectual capital, communications and branding. This probably makes the “hype” problem – if it is a problem – worse. The savvy investor might be better served giving greater consideration to the motivations, traits and prior experiences of the leadership team (and talk to some of the folks outside the C-suite to hear if their stories ring true) rather than basing their judgment on models or systems. Even if hype is not a strategy, passion is priceless. Perhaps this is what the dot-bomb taught us back in the heyday of loose change. No one wants to repeat that history, and hopefully we have all learned from it. Then again, perhaps this idea sucks.
The best organizations not only adapt to change but create it. That means we have to live with hype. But if business history provides us a guide then truth will remain stranger than fiction.
Michael, I agree with you on many points here. Business plans being destroyed by analysts is not pretty. I’ve been in many such meetings and thought to myself “If these cynical bastards knew how to build an empire from scratch, they wouldn’t be here doing THIS!”
However, my point here is to encourage the entrepreneurs themselves to think a little more like analysts… and a little less like dreamers. I am *not* encouraging analysts to become even MORE cynical.
When an entrepreneur learns to think critically, utilize superior commercial acumen and plan for profit… they are far more likely to hold their own and defend their vision, in discussions with the afore-mentioned cynics.
This post is a call for entrepreneurs to grow up. Perhaps there is another post needed to encourage investors, corporate analysts and their lawyers and accountants …. to regress back to their inner child.
I appreciate your comments. This discussion is making me think hard about the ideas I’ve presented here. 🙂
Have to expand on your great comment above. The US economy can’t get going because we’ve all lost touch with our childhood, adventurous selves. We’ve had our inspiration and natural geniuses “trained and tested away.” If you read Ben Franklin’s autobiography and the like, then you know what a person with little “schooling” (what passed for education today.) can achieve. In fact, many of the greatest minds dropped out of school or had a problem with the structure.
Today we all walk around flashing our job & educational titles instead of flashing our innate talents and kickass spirits!
It’s time for “new” needs and wants. Yet, our vision for those are restrained by the mental restraints we’ve learned to put on along the way. I’ve been untraining myself for years!
Economies are all about taking risks. If folks are trained to look for the safe route, they’ll never get on a ship like those Italian, Spanish and Portugese dudes did and head for god knows where. Ben Franklin did similar sorts of things.
We’re all raising frightened people. An entire high school school was locked down recently because someone brought in a bic-ish lighter!
Giulietta, rebel girl.
Actually, I got a bit caught up in my own train of thought… upon review I think the 7 points you categorized are right on target; and they include the financial picture. Wasn’t suggesting we drop our analytical tools just that we keep them in perspective.
It’s a great game, the game of business. One where we need to retain a childlike playfulness even as adults responsible for creating value in the world. We can all use the message, “grow up!” from time to time. I seem to need it more and more as I get older. 😉
Thanks for a stimulating piece. Peace.
Thanks for dropping this in – I knew all along we weren’t really disagreeing … you made some *very* important points.
It’s a paradox really: Entrepreneurs need a balance (and imbalance!) of childlike playfulness and dusty old investor smarts. The secret is knowing when to use which one.
I justed visuallized “Stewart” from the old Mad TV series doing his “Look What I Can Do!” schtick. Prancing around for attention and hurting himself in the process.
When I tweeted this purely on the title I knew I’d love the article … and I do 🙂
Yes, there are some great ideas that *should* see the light of day but don’t because the *world* (analysts, banks, investors) can’t see the possibilities. But wait … if *they* can’t see the possibilities, chances are the customers can’t yet either.
I don’t care how AWESOME your idea is … if you can’t show me how it’s going to make money … well, you’re not an Entrepreneur, you’re a dreamer.
Love this post … and love the rant … *more* *more*
Thanks for the comment and the tweet Cat 🙂
I think it’s the ideas that fire up both the customers AND the investors AND the entrepreneurs…. that win. Simple really 🙂
Yep good article.
Reminds me of my early “start-up networking” days as a lawyer. I would always put the business cards of those “strangers” I met in a separate pile and never bother entering them into the system for a potential follow up. Then 6 months later I would check out the URL or perhaps call the number on the card to see if they were still going – of course most were not so it lightened the work load considerably…
Hey Andrew! Thanks for stopping by 🙂
I never bothered to follow up at all with the people I met at networking events early in my career… but I don’t doubt I would have found the same result!
I am in start up mode right now Peter so this is a timely post. This is not my first start up but it is in a new industry with new clients and new rules. Fortunately I had the luxury of being able to attract two talented folks that balance out my lack of knowledge in key areas.
What a lot of newbie entrepreneurs see when they look at successful businesses is the end result. The finished picture. What they don’t see, and what the owner of these businesses can never really articulate, is how much blood, sweat and tears went into this venture.
Great ideas are a dime a dozen and the only thing that matters is execution. Persistently getting up each day and doing it, doing it, doing it. That is why I find it so laughable the amount of trees wasted on non-disclosure agreements. Ideas, in and of themselves, are useless…well executed ideas start having value when revenue in is greater than revenue out. Meaning the idea has been converted into a sustainable business model with a lot of trial and tribulation.
Here are two points and I will end this rant…
1- Build Some Street Cred
If you have a great idea and need some money, take some time to create credibility by at least creating a blog and writing about the niche you plan to dominate. You don’t have to share your idea but by forcing yourself to write about the niche, you do two things. One, you learn things about the niche you didn’t know you didn’t know. Two, you have a place to send folks that might invest in you (they really aren’t investing in your idea but you already knew that didn’t you) so that they can see how you think and see what you know.
2- Make sure you are solving a real problem
The key to success in any venture or product development process is creating a solution for a really interesting problem that people have (even if they don’t know they have the problem). But I would caution you against only making a marginal improvement to an existing solution to a problem. The switching cost for many folks makes migrating to your solution, even if it is better, simply not worth the hassle.
For example, we can all think of a dozen ways to improve facebook….but getting folks to switch to your platform that solves the shortcomings of facebook will be a long hard struggle. The switching costs are simply too high.
So build some credibility in your niche, scrape enough money to fund a demo of your product (you will be amazed at how much you will learn just making your idea slightly tangible), and go find someone to write you a check for it. If you can do all three, you might have something.
A huge THANK YOU for this wonderfully insightful comment – you’re positively outshining my original post with value here. It’s fantastic to get this kind of input from someone who I know has “been there and done it”.
+1 on solving a real problem and finding that niche no one else dares touch.
If you can get those two things crystalized and then put a clear, simple marketing plan in place to communicate and drive it, you’ve got yourself a winner.
Found this article from a tweet a few minutes ago and I love it! Having spent the last 5+ years bootstrapping a business from nothing (while working full-time in a “day” job), I really appreciate REAL profit. It saddens me to think we didn’t learn from the Internet bubble and think business is sustainable when the costs are greater than the revenue. This is basic business 101, why do the “smartest” people get confused by such a simple concept?
I also love the idea of meeting a real need (not theorizing about it) and having something to show for it. Derek Sivers and Seth Godin talk about 0.1 and shipping it. If an idea really is so great, a basic version should be pretty straightforward to setup and start serving people.
Also (and this is a whole separate rant for me), why are there so many people with “Internet ideas” who aren’t actually developers of the Internet? Isn’t that like going into the restaurant business if you don’t know how to cook and have no taste buds? As a developer, I get a little frustrated that people talk about the success of Sergey Brin, Larry Page, Mark Zuckerberg and the like without mentioning they are computer scientists! These guys built their ideas, they didn’t talk about getting funding to get someone else to build it for them.
Hey Luke! Glad you discovered the site – thanks for leaving a comment. So glad you *get* this.
I had never thought about the lack of actual developers with the startup dream – one of the rare exceptions is Steve Jobs who ISNT a code guy…. but then again, he’s not founding a dotcom startup is he.
Hmmm. Good point man. Good point.
Greetings from Ohio! I’m bored to tears at work so I decided to check out your blog on my iphone during lunch break. I enjoy the knowledge you present here and can’t wait to take a look when I get home.
I’m amazed at how quick your blog loaded on my mobile .. I’m not even using WIFI, just 3G .
. Anyhow, amazing site!
Nice article man! So true, it is so much comfortable to live in ur head than i nactual reality