Master Class: Startup Basics

Waverly Deutsch: So you want to be an entrepreneur, and you think you have a great idea for a product or service that can’t miss. The market will eat it up. Let me tell you one thing: don’t fall in love with that idea. First of all, the idea that you start with is very rarely the idea that you end up commercializing and taking to market.

Why? Because you learn so much about things like product market fit, and what the market really needs, and who your customers are as you work on it. So you don’t have to have the perfect idea; you have to have an idea that you want to take forward.

Second, when people are really, really in love with their idea, they’re afraid of intellectual property theft. Someone is gonna steal this idea.

Folks. Remember, ideas are a dime a dozen. There’s nothing protectable about your idea. And if your idea is so easy to execute against that anybody who simply hears it can build a better business than you, you’re already in trouble. You need to be talking about your idea. You need to be vetting it in the fires of criticism and constructive feedback.

And lastly, when you fall in love with your idea, you tend to stay with it too long. When you start to hear consistent market feedback that your product or your service is kind of a nice to have, but not really a need to have, or that other competitors do it just as well or better than you, or that your customers don’t want to pay as much as you would need them to to build your business, it’s time to let go.

Beating your head against the wall means you’re gonna lose more time, more money, and more opportunity than if you had just let go of that idea. In fact, entrepreneurs who learn to validate and test and let go of ideas have a much higher chance of landing on the idea that they can actually bring to market.

Waverly Deutsch: Hello, entrepreneurs. Every day we read in the press about companies in California, Chicago, Texas, Boston, raising millions of dollars from venture capitalists to help them grow their new companies. Maybe you yourself know somebody who’s gotten money from someone that we call an angel investor, a private individual who puts money into entrepreneurs to help them start companies.

But don’t count on your company getting that kind of help. The numbers are not with you. Every year, about half a million Americans start a new business, but angel investors only do about 70,000 deals a year.

So they only fund about 15 percent of those new companies. And it gets much, much worse when you try to get venture capital money. Venture capitalists only invest in about 1,500 new companies a year. That’s 0.2 percent of startups.

So it’s your job as an entrepreneur to make sure that you start your company with enough money—from savings, from friends and family, from generating revenue that you give it a fair chance to begin. Because even if you are a company that’s eligible for angel or venture capitalist investment, they don’t invest in ideas. They invest in companies that have taken some of the risk out of the equation. Angels wanna see a working product, maybe even some early customer activity. And venture capitalists definitely want to know: Is anybody using this and have you started growing?

So give your business a fair chance, take some of the risk out of the equation, and good luck.

Waverly Deutsch: Your product or your service is ready to go, and now you wanna get it into the market, but you think it’s so fantastic, people are gonna come to you to buy it. They’re not.

I think the worst myth ever perpetrated on the American entrepreneur was when Thomas Edison said, build a better mousetrap, and they’ll beat a path to your door. Customers don’t even know you exist. How can they beat a path to your door? You have to learn to sell.

And not only do you have to learn to sell, you can’t hire somebody to do it for you. Your product has no brand, no reputation. It’s probably not as robust or ready for the market as it ultimately will be. The only thing it has is your passion, your vision, and your belief in it. And quite frankly, that’s what people are buying when they buy from early-stage entrepreneurs.

So you have to learn to sell, and in my research in the Kauffman Firm Study database that tracked new companies that launched in 2004 all the way to 2011, I observed something very interesting. Those companies that didn’t learn to sell in their first two to three years of business went out of business. Whether they went out of business in their second year, their third year, their fourth year, their fifth year, their sixth year, their revenue trajectories were flat.

But companies that survived, their revenue lines jumped in years two and three and kept going up. So you have to learn to sell, and you have to do it fairly quickly.

Good luck.

Waverly Deutsch: Entrepreneurs, my students always ask me what I think about businesses that count on users rather than revenue. So companies like Twitter and WhatsApp that don’t charge for their services or products, just give them away in order to get lots and lots of people using them. I call that the California Business Model.

Why? Those types of businesses emerged in Silicon Valley, where they were funded by deep-pocketed venture capitalists who hoped that those kinds of businesses would get so many users that some big company like Facebook or Google would wanna buy them just for their user base. The problem is what you don’t read about in the press is the myriad and myriad of similar apps, websites, applications that gave their content away, gave their functionality away, never went anywhere, and just went out of business.

So I tell my students, being a conservative Chicago-type of business person, that I believe that business models have revenue models. Do you know how you’re going to make money? Do you create enough value for your users that they’ll pay you for it? To me, that makes a solid business model. Revenue allows your company to survive without other people’s money without the venture capitalists.

I wish everybody in California the best of luck in selling their companies to Google, but for my part, gimme some revenue.