Editor’s note: Investor and entrepreneur David Gardner is founder of Cofounders Capital in Cary and is a regular contributor to WRAL TechWire.
David Gardner
CARY – I got some really good advice when I was doing my startups but I also got some really bad advice. Some of that bad advice has persisted today and become so ubiquitous that it has almost taken on the status of common knowledge. Maybe advisors and venture capitalists repeat it to entrepreneurs because it’s what they have always heard… so it must be true. I think it’s time to call out some of this often-heard advice for the crap that it really is.
Bad advice.
- You are not a serious entrepreneur until you quit your day job.
I’ve talked to many entrepreneurs on the verge of personal bankruptcy because of this little piece of very bad advice. A venture capitalist may not be willing to invest in your startup until you are ready to commit to full time but this does not mean you are not a serious entrepreneur. There are many ways to vet and de-risk an idea or approach while still gainfully employed. You can talk to subject matter experts, mock up your product idea, do competitive analysis, test value propositions with potential beta customers, etc. When we are engaged in this process with entrepreneurs we often find that the value props are not strong enough or that the sales cycle is too long for a venture to be viable. This is disappointing enough without also recalling that you don’t have a job now and you’ve blown through your savings. Even when the idea does pan out why would an entrepreneur want to start the cash burn prior to proving out the business model? Most successful entrepreneurs can tell you of at least a couple of ideas they vetting that did not work out prior to landing on the one that did pass muster. Startup founder salaries are usually pretty crappy so avoid this bad advice by keeping your day job and building up all the savings you can before pulling the trigger on a well-vetted and well-funded venture.
- Take all the money you can raise.
The fact that most ventures do end up needing more capital than the original models called for does not mean that this advice is good. Although there are many factors that go into deciding how much money a venture will need, the general rule is simple, raise just enough capital (with a reasonable buffer) to get your venture to the next valuation milestone. Capital is most expensive from a founder’s equity perspective early in the venture so don’t part with more ownership than you must. Talk to the “next round” investors and understand what they need to see to meet their investment criteria. Once you know where the goal posts are then you can raise only the capital needed to get there. The valuation of your company will increase dramatically as you reach each of these inflection points. There are two predominate challenges to being a successful entrepreneur. First, you need to make your venture thrive but equally important, you need to still own enough of it at the exit to care. It may sound like a conservative and sensible approach to take all of the money you can raise but in reality, this is really bad advice.
- Your have to have a minimum viable product before you can raise money.
This may be true if you are building some never-before-seen science but for most startups this is just more bad advice. You can waste a lot of time and money building an MVP afterward only to learn there is no market for your product. You are building your product because you assume that once complete, it will have certain value props that customers will be willing to pay you a certain amount for. The vast majority of the time, the unknown real question is not whether or not you can get the technology built. That is just a function of time and money. The real risk centers around your hypothesis that once the tech is working that your value propositions and price points will be realized. This is the business. The technology is just a necessary expense. In most cases you don’t have to build a full working MVP to vet those business assumptions. You can simply mock up some user screens or laser print a model accompanied by an exceptionally well-prepared deck discussing your perceived value props and ROI once the technology is available. This is most often all you need to vet an idea. In other words, you don’t need to build a complete working drill bit before you can discuss the value of having holes when and where your buyer might need them.
As previously mentioned, most of the time these ideas do not pass muster in the market, so why spend a lot of money developing a functioning MVP when all you really need is feedback on your perceived value props and pricing? Most people assume that you can make the product work. The real issue is what then? Remember it’s not about your product. It is all about what that product is going to be able to do for the buyer. If you provided a magic pill that produced the same value props then customers would just buy that from you. So, don’t be misled by those saying that you have to have a full MVP before you can properly vet a new idea or venture.
Conclusion
There’s a lot of bad advice floating around. I wish I had spent more time talking about it in my book but hopefully I can debunk some of the most pervasive bad advice in my next few articles.
(C) David Gardner
