Want your start-ups to survive?
Build businesses, not technologies.
Entrepreneurship is definitely on the rise in the DMV (Delaware, Maryland, and Virginia) area, fostered by governmental and institutional support and great talent. Over the past decade, state and local governments and universities have invested in many funds and incubators to help foster the development of new businesses. The DMV area also has the advantage of being home to many great universities and research institutions making engineering talent readily available and new technology innovations abundant.
Unfortunately, we haven’t seen many great businesses coming out of these efforts…yet. What I mean by “great businesses” are businesses that are delivering new solutions to replace old ones, are growing revenues rapidly because of fast customer adoptions, and are well on their way to exceed $100 million in annual revenue. In talking to some people familiar with the incubators, startups, and early-stage companies in the area, I learned that there are no statistics tracking the companies’ post-graduation lives. Without solid statistics, we really don’t know for sure why we haven’t seen many great businesses here, despite the investments that have been made in the early stage. Businesses have failed to survive or grow for many reasons. Therefore, it’s hard to attribute this lack of success to any single reason.
However, one theme that I heard over and over again was that a great many of these early-stage companies are challenged in generating sales traction, thus failing to turn their technology into a viable business. Because of that failure, they couldn’t raise additional funding, either Seed or Series A, and their businesses couldn’t continue. This is something I believe can be solved. To solve this problem, we must first examine the existing approach being taken to cultivate these startups to become good businesses. Like the famous investor Mark Cuban said, “In my opinion, right now there’s way too much hype on the technologies and not enough attention to the real businesses behind them.” We need to shift our focus away from developing technologies to that of building businesses.
New technologies don’t necessarily translate into profitable business opportunities. As a matter of fact, most new technologies can’t be commercialized. That’s why our universities and research labs are sitting on many patents and new discoveries. For sure, these new technologies and inventions will collectively advance the efficiency and productivity of our society, but only a few of them will be successfully commercialized and become the foundation of profitable businesses. So instead of asking the question, “Is this a great technology”, we should ask “Can this be commercialized to become a good business?”
To make the shift from a technology focused approach to that of a business focused approach, we need to begin performing market opportunity assessments for these new technologies. Essentially, we need to be able to determine if a given technology can be commercialized successfully. So, what questions should be asked to enable us to make this determination? A few come to mind including these 4 questions:
1. What problems can this new technology solve?
2. Which markets have these problems?
3. In each market, what is the value to solve this problem?
4. In the markets where solving the problem has value, can the value be extracted efficiently? In other words, will there be buyers willing to pay sufficient amount of money to solve their problems?
Answering these kinds of questions, will provide two possible outcomes:
1. We’ll discover that there is not a viable business for the technology (i.e. no product-market fit). That’s OK. The entrepreneur can then be redirected to focus his/her energy on exploring other business ideas and opportunities. Part of being successful is being able to saying “no” to things - things that are doomed to fail - before wasting a lot of time and money; or
2. We’ll learn that there is a viable market for the technology, preferably in multiple customer segments. Congratulations! We have discovered a valid opportunity for the entrepreneur to build and grow a business. If the entrepreneur then wants to invest more time and energy into trying to build this business, we need to teach them how to start testing their hypotheses and validating their assumptions. But that’s a topic for another time…
Jackie Luo, TCV Partner