In this article, CFSG discuss one of the most common start-up pitfalls - developing a business in a vacuum. We look at what it means, how it happens and how it can be avoided.
One thing is certain, there is no shortage of creative start-ups.
In our capacity as an investment bank we meet a diverse range of entrepreneurs every single week of the year. All bright people with some really intriguing and interesting business concepts. So the inevitable question.
With so many great business ideas why do only a handful of start-ups manage to raise capital?
There is no single answer. However, in our experience many of those that fail have a tendency to approach their start-up backwards. They may not realise it but they have been busy trying to fit a problem to a solution rather than the other way around. These businesses then face the uphill battle of trying to sell a ‘nice to have’ to their target audience / investors rather than a ‘must have’ solution.
We see it all the time. A start-up invests a lot of time, effort and money on an idea that they have unknowingly developed in a vacuum. They build a solution that they think a particular target audience needs, but they don’t really know.
It usually goes like this:
- Founder has a brilliant business idea.
- Founder researches their chosen target market / industry – e.g. opportunity size, barriers to entry, pricing, distribution channels, competitors etc.
- Founder builds a prototype (and hopefully tries to build some proof of concept).
- Founder tries to raise capital.
The process does indeed make sense, but it is step 2 where problems can occur.
Most start-ups are quick to research their target market/industry on the back of their brilliant idea. Don’t get us wrong. It is great to have enthusiasm and get excited. However, the problem comes when they try and make the research “work for them”.
It is emotional
Start-ups can become so fully invested in their business idea that they convince themselves that a genuine need exists even when there may barely be a ‘nice to have’. They make assumptions about an industry. They think that they are solving a big problem for their target audience.
Consider pharmaceuticals. Drug companies don’t just produce drugs. OK, sometimes they stumble across a winner or find other application. But usually they identified an existing medical condition and then work towards a treatment.
As such, too many start-ups are developing cures for ailments that either do not exist or are too insignificant.
Write what you know
There is an old saying for budding authors to ‘write what you know’. The idea being that you should draw on firsthand experience to really craft something special. The same can be said for entrepreneurs.
Now before I get taken to task, I concede that this is by no means gospel. A great idea will always be a great idea.
However, there is something to be said for having worked in an industry, or having firsthand experience with a particular target market. It means that you have a kind of inside knowledge and understand the mechanics that outsiders either don’t see or don’t fully appreciate.
Again, it is great to have ideas and to think outside the square. But it certainly helps to approach your solution (i.e. start-up idea) with some level of intimate insight and experience.
Ultimately, entrepreneurs should not be so head over heels in love with their start-up idea that they make their research work for them. Think about it. Fitting a problem to a solution is counter intuitive to real problem solving. It is like trying to exit your garage in reverse.