Business Forum: Successful entrepreneurship means knowing how business decisions get made

My interaction with an engineer who came to me to raise capital to start his software company provides me an opportunity to recap some of the points I have made in years past.

MILTON CHANG

My interaction with an engineer who came to me to raise capital to start his software company provides me an opportunity to recap some of the points I have made in years past (see sidebar, "A reminder for entrepreneurs"). I am describing it here, even though the business is unrelated to photonics—the generalizations we can draw from this experience are useful for any high-tech business. I will first present it as a case study, and then provide commentary to summarize how one can minimize startup risk if you ever decide to become an entrepreneur.

This entrepreneur, who did almost everything perfectly, was properly introduced by a friend who is an aerospace technology company executive whom I respect. He came with a successful angel investor who provided him his seed capital to provide support. The PowerPoint presentation he sent in advance was well-prepared, succinct, and convincing.

The management team appears technically competent. The entrepreneur who contacted me is the CEO, has a degree in software engineering, and held a responsible sales position in a prominent computer hardware/software company, while the technical team is led by a CTO who held an important software development position in a popular public Internet company. The company also has a professor who specializes in this field as an engaged consultant.

Everything looked good at the meeting, too. The CEO was confident and put on a good show. The short (10-slide) PowerPoint pitch was effective and compelling, and the company has made considerable progress with a prototype product showing close to 6X improvement in speed at a supposedly lower operating cost.

I was a bit concerned that none of the individuals in the company are in the industry that the software is intended for, but I brushed it aside since the case they presented seemed compelling. The product serves a current need and the market potential is vast. In short, I can tick off almost everything on the usual investment checklist. Still, I felt it would be prudent to get input from an industry insider.

I was fortunate to be able to engage an individual who founded a company in this field and sold his startup company to a large computer hardware company. His feedback to me after reviewing the PowerPoint and chatting with the CEO was terse: "The technology platform they used to build this application is well accepted in the industry, but commercialization of it could be challenging, as there are other good-enough extensions in the public domain now." That is, his value proposition is good, but not good enough! The implication is that an established company in the field could readily come up with a comparable solution.

I began to see the flaws. In retrospect, like a typical engineer, I was enamored with the technology, and so winded up paying inadequate attention to the business case. An industry insider, in contrast, would have the intuition to know who does what to whom and how business decisions are made. This company got the big picture right, but missed that nuance.

With the insider's feedback, flaws became evident. Market research did not get to the heart of the issue—sales projections were based on assumptions and extrapolation of superficial customer feedback. And the CEO's financial objective was pure fantasy based on his optimistic projections.

Will I be investing? That depends on whether I can convince the CEO to come up with a business strategy and a plan that is realistic. This is a worthwhile exercise for the company, too, to avoid wasting time and money to come to the same conclusions years later.

I am taking this opportunity to let you know that I will only be writing this column occasionally from this point forward. I hope you will save this summary for future reference when and if you decide to become an entrepreneur.

Feel free to write me at any time. I always respond promptly to thoughtful questions relating to business or careers. I also encourage you to send me an e-mail (do it now!) to tell me what you like and what you disagree with regarding what I have presented in the past. Your feedback will be greatly appreciated because it can bring pleasure to me as I sit in my rocking chair.


A reminder for entrepreneurs

Idea
  • Find a product idea within an industry you know well and make use of your expertise to provide an initial competitive advantage. Pursuing a "hot business idea" in an unfamiliar industry is high-risk.
  • It takes more than a breakthrough technology or a useful product to succeed. You must also be able to make a strong business case and develop a financing plan that is consistent with your business development strategy. Technical merit is not synonymous with commercial success.
Business plan
  • Developing a detailed business plan is making a simulation run of your business to enable you to refine your strategy. You won't be able to focus to make efficient use of your energy and resources without going through this process.
  • Use solid marketing data to develop your business plan and modify it as you gather new information. The business plan is also an effective tool to communicate your operating principles to your team.
Financing plan
  • Keep your initial pitch succinct to pique investor interest, not to swamp them with details to drown out the salient features. Investors can and will ask for details in subsequent meetings if they are interested.
  • Inadequate financial support to reach the next significant milestone is likely to become a fatal flaw. Investors look for validation to provide additional funding.
Company culture for success
  • Getting the first product to market is job one! The product has to work well, and you can always refine and add features in accordance with customer input.
  • Provide a work environment where each employee can self-actualize to perform to their full potential. That's good for the individual and good for the company.
Preparing for entrepreneurship
  • On-the-job learning is the most effective way to gain practical experience to run a business. Strive for technical excellence and sharpen your entrepreneurial ability by participating in sales and marketing.
  • You have to be broadly knowledgeable, and know what makes different businesses tick and what goes on in different parts of the company when you make CEO decisions.
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