Why I Hate Your Market Size Slide
A version of this article was previously published on Propmodo in Sept 2018
Given how much topic annoys me, it’s surprising that I haven’t written about it before.
As managing director of Dreamit UrbanTech, I see well over a thousand (if not 2000) pitch decks a year. Now that we work with more mature, pre-Series A round startups, most of our applicants have already raised a seed round and may have even gone through other accelerators, so it’s more than a little bit surprising to me that somewhere between 10-20% of those applicants still have unnecessarily complicated Market Size slides.
Here’s an example of what I mean:
Yeah, you’ve seen it before too. Looks kind of impressive, doesn’t it?
Unfortunately, here’s what I see:
Let me break this down for you you:
- Total US Construction – The startup sells software. Why do I care about money spent on concrete, labor, etc.? That’s no more relevant to this startup than Dim Sum sales in Moscow.
- Contractor Software Spend – They sell software to subcontractors. If a general contractor is spending $50K or $100K a year on Procore, why does that matter? Those GCs have no use for this startup’s product, will never use it, and will certainly not be spending any of their money on it. Might as well toss in revenue from video game sales for all that has to do with this market.
- Subcontractor Software Spend – Right type of product, right customers – now we’re getting somewhere. Probably still a top-down estimate but at least this is less obviously wrong.
Top down is for convertibles, not pitch decks
Let me let let you in on a secret: top-down market size estimates are almost always incorrect and generally useless to an investor.
Why are they almost always incorrect? Because they typically capture a lot of related spending on different types of tools. In the example above, the figure includes spending on other construction related software, not to mention more general purpose software like Microsoft Office and Quickbooks. Furthermore, the top-down approach ignores pricing. Let’s say, hypothetically, that you make software that replaces absolutely everything the subcontractor might possibly buy but do it at a tenth of the price. By definition, your market is 90% smaller than the top down estimate suggests. Alternatively, say you provide a solution that’s much more functional and valuable than anything on the market and expect to price at a premium to existing software. In that case, the top down market size estimate understates your potential.
The more accurate and useful way to estimate your market is bottoms-up. It’s really not that complicated. At the end of the day, it is simple third-grade math: Total number of potential customers times what you plan to charge. Really, it’s that simple.
So that’s what an appendix is for…
I called top-down estimates “generally useless” instead of simply “useless” for a reason. They occasionally are a useful appendix slide as a sanity check. If you are creating a completely new product category and your bottoms-up market size estimates are large, it’s good to know the size of the total budget you are competing for. For instance, if your bottoms-up estimate comes to $100B and the software spend for the entire construction industry is $130B, you are essentially arguing that your customers will either stop buying 77% of all the software they currently use to buy yours or that they will manage to steal budget from other departments. Not entirely impossible, but extraordinary claims require extraordinary proofs. Needless to say, you’ll get a lot less pushback if your bottoms-up estimate came to ‘just’ $10B out of $130B.
Who’s on first?
As simple as the above TAM equation is, it still has two variables: number of customers and price. So if you haven’t told me what you charge, the equation isn’t going to make much sense. You need to define the price variable before adding the number of customers into the mix. That’s why your Revenue Model slide should almost always immediately precede the Market Size slide.
In some cases your Revenue Model may be a bit complicated. Your price may increase based on usage (e.g., number of seats or concurrent users), frequency (e.g., API calls, reports or searches per month), or value received (e.g., which modules they subscribe to). Your Revenue Model slide should include this detail at a high level but should also clearly show what you believe the average spend will be across all your customers. Assuming the reader thinks that estimate is plausible, he or she can seamlessly plug it into the market size equation on the next slide.
Maybe we can meet in the middle?
Typically, when you see the infamous 3 circles the only number that matters is the bottom circle but, alas, not always. Sometimes the Total Addressable Market is actually the middle circle. For example:
Now we have to actually think about it (dammit!). If the startup is pitching software for roofing subcontractors, the bottom circle is the relevant one (and I can stop reading right there because that market size is way way way too small). But if a founder is making software for all subcontractors and they’ve identified roofing subs as the first subsegment they are targeting as they go-to-market, then the middle circle is the one that matters when it comes to TAM.
Bear in mind that the bottom circle is not wrong. It’s even interesting and relevant information as far as an investor is concerned. It is simply in the wrong place. “TAM” means “Total Addressable Market”: if everybody who could use your software uses it, how big is the market? If you choose to sell to some types of customers before others, that information belongs on your Go To Market slide.
Don’t sell yourself short
What would you make of this slide?
At first glance, this looks like a $200M market. That’s a nice size for a self-funded company, but it is generally not considered large enough for venture funding. But take a look at footnote 3. This company is assuming that they ultimately get only 25% of the total market. This may very well be true but they are selling themselves short. Investors think in terms of total market size; all our rules of thumb implicitly assume that the startup will only capture some of that total. In theory, we should be able to correct for that but, psychologically speaking, the low number sticks in our mind. Plus that assumes we caught this in the first place. As I mentioned before, we don’t particularly like it when you make us think.
When top-down and bottom up are the same
Before I get more than the normal volume of hate mail and ‘gotcha’ email, there is one legit exception to this rule. Under certain revenue models, the top-down estimate is actually what drives your bottom up number. For instance, if this software was used for purchasing construction material and had a revenue model where the software was free but they got a commission on all sales of, for instance, 4% of contract value then the top down figure of everything spent on construction supplies is actually the entirely relevant input to the “third-grade math” equation for market size: Total purchases x 4% = TAM.
You would still have to be very careful to exclude the types of construction supplies that are not on their platform (e.g., if you can’t sell cement, you have to pull that spend out) but in this case, the top-down data is not only valid but necessary.
“The TAM Commandments”
With the above in mind (and apologies for the awful pun), here’s a quick recap of what you can do to make your Market Size slide as effective as possible:
- Thy TAM shall be a single figure.
- Thou shalt have no other market figures before (or after) the TAM and expect Me to figure out which one (or two) to ignore.
- Thou shalt use bottoms-up estimates. Top-down estimates are an abomination. (Except when they aren’t)
- Remember thy Revenue Model slide and keep it before your Market Size slide
- Honor thy Go To Market with its own slide. Leave GTM strategy off the Market Size slide.
- Thou shalt not kill your Market Size by reducing by your expected market penetration
- Thou shalt email me if you can figure out a way to riff on adultery, theft, bearing false witness, and/or coveting your neighbor’s wife in this context.
Thanks for reading and please share this with all your friends… because I’m sick and tired of bad Market Size slides.
Note: This example is loosely based on Dreamit UrbanTech alumni Knowify. Their Market Size slide looked nothing like this and, for those of you who actually read the footnotes on the charts, the $800M TAM is 800K subcontractors in the US x an average software subscription price of $1000 per sub. So in other words, Knowify did it right. 🙂
PropTech Pitches That Are Past Their Expiration Date
A version of this article was previously
published on CREtech in Sept 2018
Coming off another successful recruiting for our 3rd Dreamit UrbanTech cohort, we had the pleasure to meet quite a few truly incredible startups.
This piece is not about those startups.
This is about the other ones, the startups that, like milk past its expiration date in a coworking space refrigerator, we’d really like to quietly disappear and be replaced with something fresher. So, after canvassing a few of my colleagues, I’ve compiled this list of startup pitches that, absent extenuating circumstances, we’d just as soon not see again.
It’s a community portal for tenants
I live in Manhattan. I don’t even want to talk to my neighbors in the elevator so why would I want this? In virtually all the buildings I’ve lived in, there has invariably been “that guy” (or woman) who has tried to rally the other tenants to be more social. Often, we like “that guy” a lot – he’s nice, he takes our mail in, signs for our packages, etc. We just have no interest in what he’s trying to do.
Kidding aside, there’s nothing about this idea that couldn’t have been done as far back as the late 90s which should be a huge red flag to any entrepreneur considering a startup like this. With so many hungry and talented entrepreneurs out there, good ideas don’t just sit around waiting. In fact, established companies like BuildingLink have community sections that are invariably ghost towns. If you have a burning conviction that the world needs a tenant community portal, you should consider the possibility that you are “that guy.”
It’s a real estate crowdfunding site… but with blockchain!
The most charitable thing I can say about these pitches is that they (or most of them, at least) were not ICOs.
We started seeing pitches for real estate crowdfunding sites as far back as 2014, if not earlier, and there are already a number of players in the space with significant head starts (RealtyShares, Fundrise, RealtyMogul, Patch of Land, etc.) so if you are a pre Series A startup in the space, you are pretty late to this party. Since these are basically marketplace plays, first-mover matters.
But wait!” you say, “we use blockchain!
So what? It’s not that hard to keep track of fractional shares in a building using an old-school, centralized ledger. If you standardize the legal documents and purchase process, you’ve already removed the friction on this process. The hard part here isn’t transactional friction but marketplace liquidity: you need enough buyers on the platform so that when someone wants to sell their shares (or tokens) in a property, there is someone willing to buy it. If you don’t have a deep pool of potential buyers, you end up with an asset like small cap stocks: easy enough to buy but hard to sell (especially in a down market!)
The possible exception to this rule are companies like Harbour who focus on tokenizing high-end trophy properties. These are the blue-chip stocks of the real estate world. There will likely always be smaller investors willing to own a piece of the Empire State Building. So giving its owner the ability to sell part of it to a mass market rather than to the current small circle of big players who can afford to invest at that scale both greatly increases marketplace liquidity and reduces transactional friction, unlocking (at least in theory) significant value for the building owner.
It’s a lead gen site for commercial real estate
I have the utmost respect for lead gen and, given the size of these transactions, there is potentially a lot of money to be made selling leads to landlords and their brokers. The trick is getting the tenant to start their search on your site… and you need to do it in a way that your competitors cannot immediately copy or else your cost of customer acquisition will be bid up until your margin is gone. Put another way, if you are using Google AdWords to drive traffic to your site, so can your competitors.
Zillow, for instance, succeeded in creating a site that residential buyers know to go to at the very startup of their home or apartment search by aggregating and cleaning up messy, fragmented public data and presenting it to the public in an easy to use interface. In theory, anyone could have done this but they moved first and fast, creating brand equity that’s hard for a potential competitor to displace without either creating something a quantum level better or spending a lot of money on advertising to launch a competing brand.
Our app helps community residents get in touch with their representative and get more active in local politics
If they wanted to do that, wouldn’t they start by at least voting? This is an example of civic tech backwards think: instead of creating an app to fill demand, they want to create demand with their app. And since here too, people have been banging their heads against this wall for nearly two decades, if you still think the public is just dying for an app like this, it’s very possible that you are “that (other) guy.”
We are a chatbot for residential brokers
It is telling that these startups rarely include successful real estate agents on the founding team. Converting a productive buyer into a client is mission critical, especially in an industry with little competitive differentiation. Agents convert products with personalized service and emotional rapport. A chatbot is the exact opposite of this and, as a result, agents are extremely reluctant to rely on them for this stage in the conversion funnel.
The rental side of real estate, especially on the lower end of the market, can be a brutal, time-consuming slog. Most agents transition from representing renters to other parts of the market as soon as they possibly can, leaving this segment to newbie agents or high volume / low service shops so it’s conceivable that a chatbot for renters’ agents might have legs….
We make 3D models from 2D floor plans
There’s value here if you can pull it off but there’s just not enough data in a 2D model to get to something buyer-ready automatically. So either the landlord has to customize the raw results a lot (too much effort for them) or the startup does a lot of post production (and becomes a service industry selling man hours rather than a scalable tech startup).
(Dis)Honorable mentions:
While not full-fledged startups, these phrases were often enough to make us gag all by themselves
Blah blah blah… drones!
Yes, drones are pretty cool and they do have the potential to change a lot of things, both in construction and real estate and the world in general. But if your startup is basically a glorified drone piloting service, you are selling man hours (not a model that VCs like to back), have no competitive advantage and no barrier to entry. To us, you are basically a taxicab company.
Blah blah blah… AI
So what exactly makes it AI (or Machine Learning for that matter) as opposed, for instance, to a simple database query? As the famous quote goes, “I do not think that word means what you think it means.“
… and the user gets a dashboard…
My car has one dashboard. Why would you expect a property manager to want 6 or 7? I’ve head the phrase “dashboard fatigue” a lot lately…
Instead of covering them another dashboard, integrate with their existing dashboard or, better yet, automate the responses to the data you collect so they don’t have to check a dashboard at all… or even think about it. Just. Make. It. Happen.
We’re Houzz meets Uber meets Robinhood
WTF?
Here’s a hint: the Hollywood style analogy should get you an instant “Ah, I get it.” If the investor has to think about it to understand what you mean, it’s a #fail. I don’t care how cool you think it sounds, skip it and cut to simple description.
Acknowledgments: I’d like to thank Aaron Block, John Gilbert, May Samali… and all my other less brave colleagues who opted to contribute to this piece anonymously 🙂
What Exactly Is PropTech?
Note: With the increasing interest in PropTech, Bisnow interviewed a number of experts in the field to answer the question “What Exactly Is PropTech?” As the MD of Dreamit UrbanTech, I was one of the people they interviewed. The interviews were published in Forbes under the headline “The Beginner’s Guide To Commercial Real Estate Tech: What Exactly Is PropTech?”
It is difficult to pinpoint when the term PropTech, which stands for property technology, rose to prominence in U.S. commercial real estate.
With the increased use of the term, the challenge is determining what it actually means. Is it synonymous with CRE Tech, which refers to all tech solutions in the entire CRE landscape? Or does PropTech refer to technology that supports real properties — both residential and commercial?
Bisnow reached out to major players in the commercial property tech space to get the scoop.
Name: Michael Beckerman
Company: CRE.Tech, RE Tech, The News Funnel
Title: Founder and CEO
“I’m a little biased because my site is CRE.Tech, so I don’t use PropTech. I feel like it’s a term more common in Europe. Everyone I know in my community uses CRE Tech because PropTech, I don’t know that people really understand what that means. It is kind of confusing — does it refer to residential or commercial real estate, or both? Is it only properties? Whereas with CRE Tech you’re talking about finance tech, appraisals, data, etc. … In Europe PropTech is the word they use commonly, whereas here we use CRE tech more frequently. I think [CRE Tech] is more universal, more on brand and more all-encompassing. CRE Tech is the entire ecosystem, whereas PropTech refers to one subset of the ecosystem — I think it is more property-specific.”
Name: Mike Sroka
Company: Dealpath
Title: CEO
“We’ve observed PropTech being used synonymously with CRE Tech over the past few years and with increasing frequency over the past 12 months, particularly in the EU markets. The general assumption is that the term relates to any technology supporting real property (residential and/or commercial). This seems quite broad and we’re not surprised to hear that people are finding it confusing. In our opinion, commercial real estate and residential real estate have many differences, are worked on by different people, with different challenges, and require different solutions.”
Name: Nathan Dever
Company: Ten-X
Title: Commercial Real Estate Technology, Strategy & Marketing
“The makings of PropTech began in the mid-1980s, marked by the founding of companies that provided software for the commercial real estate industry. Autodesk and NCREIF in 1982, Yardi in 1984 and CoStar in 1987. However, PropTech didn’t really spring to life in a big way until the mid-2000s, when cloud computing, broadband connectivity and mobile devices enabled residential PropTech giants RightMove, Trulia and Zillow to launch and show investors the value of disrupting real estate through technology. Since the mid-2000s, more and more PropTech startups have been bringing new technologies to market that address a wide variety of inefficiencies, scoring more attention and capital from technology VCs and growth funds, which legitimizes the real estate technology movement.
The taxonomy of real estate technology is still maturing. In recent years, it appears the rapid rise of smart real estate technologies, such as IoT (networked sensors, devices), is shifting the association of PropTech to property management technologies, while real estate information technologies and transaction technologies go without their own defining cliché buzzwords. Of course, there also remains much blurriness around the precise definitions of RETech, CRE Tech and FinTech.
To be honest, I try to not organize my understanding of real estate technologies around buzzwords, since many incumbent and insurgent companies have/bring crossover services that fit many of the loose definitions of popular jargon.”
Name: Nick Romito
Company: VTS
Title: CEO and co-founder
“In thinking about PropTech today, I’m more interested in talking about it functionally than theoretically. You search Google, you’ll find 10 definitions of PropTech — half focus on the nature of the solutions, but use different words, and half just define the industry as being a collection of companies. For me, functionally there are really two big segments that investors are behind currently. There’s a slice that’s devoted to virtual reality applications. We’re leading the other, larger segment that has a pressing need for solutions today — the transactional, deal-flow side.
The idea of PropTech, for me, is about transforming the commercial real estate industry without disrupting it — integrating cutting-edge technology with big data and predictive analytics that align exactly with what professionals actually do in a way that is much more intuitive, insightful and easy-to-use. No one needs to master a whole new set of processes for accomplishing key goals — the platform will let them do the jobs they’re doing better, on a tremendous scale.
Let me give an example, because any PropTech solution is only relevant to the extent that it addresses the critical pain points faced by real-world industry professionals. Commercial landlords constantly have to track at least two streams of data: first, information about all of the tenants currently residing in all of the landlord’s units across however many buildings; and second, the financial value of a portfolio of owned real estate assets. A great PropTech use case is uniting those workflows, especially since they ultimately need to be anyway. The value of the building depends somewhat on the characteristics of the tenancy, as well as what the leasing pipeline looks like. A smart, easy, intuitive and centralized dashboard that lays out all the data and also makes those vital connections and offers some predictions, assuming it’s built well, is a huge advantage for a commercial landlord.”
Name: Zachary Aarons
Company: MetaProp NYC
Title: Co-founder
“In mid-2016, real estate technology surged from being primarily U.S.-based to clearly a global trend. As the global nexus of real estate and technology, MetaProp NYC saw this growth early and led the semantic switch from RETech to PropTech at that time. The term was already used periodically in Europe, but not widely in the United States. Having originally branded RETech as the common term for the entire real estate value chain (anointing 21st Street in Manhattan’s Flatiron ‘RETech Row’ for the cluster of real estate technology firms, including MetaProp, located there), we decided to recognize the term property that prevails outside the U.S. by re-branding the worldwide movement as PropTech. In fact, we now refer to our street as PropTech Place!”
Name: Andrew Ackerman
Company: Dreamit UrbanTech
Title: Managing Director
“PropTech is the same as Real Estate Tech. From what I understand, PropTech is the more common phrasing used in Europe and Real Estate Tech more common in the U.S. In deceptively simple terms, PropTech is technological solutions that solve problems for the real estate industry. Let’s break that down:
- Technological solutions — websites, apps, devices, physical materials or any combination of these elements. Not just services, consultancies or brokers (although they might be customers for PropTech startups) and not the actual property development.
- Solve problems — It’s shocking how many startups do things because it is possible or cool without thinking through who actually cares enough to pay for what they’ve built.
- For — As in, specifically for. The real estate industry buys laptops (and phones, toilet paper, etc.) just like every other sector, but just because they are one of your customers, does not make you ‘PropTech.’
- Real Estate Industry — Developers, architects, engineers, construction firms, subcontractors, property managers, landlords, brokers or residents (e.g., tenants, homeowners).
There’s some debate about the last point. Some people carve out ConstructionTech as a separate sector targeting the pain points of architects, engineers, construction firms and subcontractors, but I see enough overlap where startups service both those groups and others within the real estate industry that it makes more sense to me to view ConstructionTech as a sub-sector within PropTech.”
Edit: Since this article was written in Nov 2017, I’ve come around to seeing ConstructionTech more as a separate sector. There are certainly a lot of overlap around the built environment and sensors but I take a very customer centric approach and I am seeing enough innovation that I’d only present to general contractors or subcontractors (but not to developers, for instance) that it deserves to be a separate, albeit related, sector.
Name: Charles Clinton
Company: EquityMultiple
Title: CEO
“Much like the term fintech captures the new wave of finance companies that utilize technology to power their business, PropTech captures the intersection of real estate and technology. This encompasses a range of businesses that are as diverse as the real estate industry itself, from leasing and property management to co-working to investing — anywhere that technology is innovating how property is occupied, managed and transacted … While the term has been used within the industry for years, it really exploded in popularity over the last year. Empirical data backs this up. Looking at Google search data as a proxy, it really started taking hold about a year ago and peaked just last month in October 2017.”
Stale Words and Hackneyed Ideas That Make Edtech Investors Cringe
Note: A version of this post previously appeared on EdSurge.
If you go to startup pitch events, you’ve seen it happen:
An entrepreneur says something—something so naïve, egregious and hackneyed—that it makes the investors, along with educators who are now increasingly in the audience, physically cringe. As funders wince and squirm uncomfortably, some are thinking along the lines of: “How do I respond to this pitch genuinely without coming off like a jerk?”
In the interest of fixing this problem at the source, I reached out to some of the advisors and investors in the Dreamit Edtech network to get their “lemon lists” of concepts, statements, and business models that Edtech entrepreneurs may want to think twice—or thrice—about.
For convenience, I’ve aggregated their suggestions into two broad categories: Cringe-worthy Concepts and Modest Missteps.
Cringe-Worthy Concepts
These are not inherently “bad ideas” per se. It’s just that the investor community have seen tons of these, and in order to impress you need to jump right to what makes your approach a quantum level better than everything else out there. Hint: “It’s mobile,” “We have a better UI,” and “It’s for millennials” are not the answers.
Student engagement and retention mobile apps
Yes, this is a big problem. But there are many startups in this space. Most of them offer some variation of the thesis that improving how “engaged” students are in their coursework and community will boost academic outcomes which will then increase retention. Yet academics are not the main reason student drop out; according to a study from Inside Track, it’s the fifth most important factor.
The other solutions I see in this space tend to throw a lot of features (such as calendars, student to student messaging, event check-in, and newsfeeds) into an app and hope better retention just happens. I’d cite a few examples of this approach but, as you can imagine, startups who take this approach rarely get off the ground and those who do don’t last long.
Parent communications platforms
There are already several well-capitalized startups (including Bloomz, ClassDojo, Remind), established companies (SchoolMessenger), and other deep pocket players from learning management system providers that already boast significant traction here. Like Peter Thiel says, if you are not delivering a 10x improvement, you don’t stand a chance.
Chatbots
Chatbots are hip and cool these days and, while I agree that they have a lot of potential, most of the pitches are simply applications that turn IBM Watson’s natural language processing technology loose on a university’s existing FAQ page. If that’s all you’ve got, what makes your business better and defensible? In these situations startups that master the space early get a rush of initial business—until the mass of fast-followers come in and drive prices down to the bare bones.
College recruiting and lead generation
The growing population of 18- to 24-year-olds in the U.S., along with the stream of foreign applicants to U.S. universities (which, to note, has taken a small dip under the Trump administration), the widespread adoption of online applications, and nearly 700 colleges accepting a common application, combine to make college admissions more competitive than ever. So finding and getting into the right college is clearly a major pain point.
The catch is that the vast majority of people suffer it only once. This means that customer acquisition is challenging and your company’s revenue model has to be rich enough to support it. Unfortunately, the days when you could sell a lead to the university solely because a student visited its page on your website and clicked “save” are long gone. For your lead to be worth much to the college you need to have robust data about that student’s underlying needs and preferences, and demonstrate that students value your site or app as a highly trusted source of information and advice.
Peer-to-peer or crowdsourced tutoring network
Simply saying “We’re the Uber of education!” doesn’t make it so. There’s a graveyard full of these startups (such as Tutorspree) and only a few survivors like Wyzant. They almost all underestimate the cost of customer acquisition and overestimate how much usage and viral boost they will get.
To be clear, it is not any specific dollar amount that concerns us; it’s the ratio of customer acquisition cost (CAC) to the lifetime value (LTV) of the customer. As a general rule, LTV has to be 3x higher than CAC for the business model to work. But when I see these kinds of businesses, if they estimate CAC at all, it’s based on a small experiment that won’t scale. So I ask them, “If the economics are that good, have you maxed out all your credits cards to pour every last cent into this customer acquisition channel?”
Invariably, they start backtracking, hemming and hawing, and eventually admit that there either are channels that cannot absorb more marketing spend (e.g., they were bidding on rare search terms that just don’t come up that often) or that CAC starts to rise as others spend more (e.g., startup bidding on more competitive search terms).
Particularly unconvincing: telling us you got a few hundred signups at your college “with zero marketing spend.” What this tells us is that you have no idea what it will cost to get students onboard at the other 4000-plus colleges you do not attend.
Any B2C app for language learning
Personally, I like using Duolingo, and Voxy is a great option for people who want to learn English. But as with tutoring networks, the customer acquisition costs are much, much higher than you think, especially the ones that, like Google Adwords, can scale with you are you grow.
Some of the apps do reasonably well at getting free users, but usage drops off pretty sharply when they are asked to pay anything. That means the acquisition cost per paying customer is very hard to recoup.
Graveyard Ideas
These next few ideas were great…back in the day. Now, the market is pretty much locked up. Startups that are attempting to build the following tools are at least 10 years too late to the party, especially if they’re attempting to tackle the US market.
Yet another student book exchange
How are you better than Chegg (or Amazon for that matter)?
Yet another LMS
Switching something as deeply entrenched in a school’s operations as their LMS is so painful that it’s basically a non-starter. Switching costs are high, and most schools are not likely to switch from solutions like Blackboard or Canvas for the sake of a prettier interface or more “social” features. Sometimes you could give your solution away for free and they still wouldn’t switch. In fact, a freebie option is emerging as some schools are adopting Google Classroom as a lightweight LMS.
Yet another Test Prep Provider
Kaplan, Princeton Review, Tutor.com … the list goes on and on.
MOOCs or General Assembly for country X
Do you know what company is “Facebook for country X?” Facebook is. (Except for in China, perhaps.) Which leads us to…
Don’t Say These Things
“90%+ of teachers hate their LMS/SIS/etc.”
And yet they don’t seem to switch. What does that tell you?
“It’s fully integrated. Plug and play… as long as there are APIs.”
So it works. If it works. Except when it doesn’t work. Gotcha.
“And we haven’t even started selling to parents yet!”
Yeah, that’s not hard at all…
“If we only get 1% of the market…”
Yeah, that’s not hard either…
“I created this because it is what my child/class/students needed.”
My follow-up question: “Is it what other child/class/students need?” If, after two years of cranking away, there are only a few dozen of other schools that are willing to pay to solve this same problem, most investors will lose interest very fast.
“We will get the teachers using the free version and then school will pay for it.”
Ah, no they won’t. Why would they when teachers can use the free version? It’s not surprising that a go-to-market strategy that avoids the pain of selling directly to a school administration by hooking the teachers and effectively deputizing them to drag the principal along appeals to a lot of founders. But figuring out where to put the paywall between free and premium is critical. The free version has to be useful enough to teachers that they will use it, but you have to keep enough value in reserve that the administration will make budget for it.
So now that you know how to make an Edtech investor cringe… please don’t. Take the time to pick the right concept and get it right. Then, we’d love to hear from you.
Author’s note: I’d like to thank all the people who contributed their ideas to this warning list… but most of them asked to remain anonymous (I wonder why?) so I’ll just say “Thank you all… and you know who you are” 🙂
How Not To Take Feedback (Don’t Be This Guy)
Note: A version of this post appeared in my semi-regular column on AlleyWatch.
Between applications to Dreamit and the many startups who approach me directly, I speak to a lot of entrepreneurs. And, while I love that part of my job, one of the least pleasant things I have to do as a mentor is tell entrepreneurs when, IMHO, they are wasting their time and need to move on. It’s so unpleasant, that I know many mentors who simply don’t do it. They gently point out “difficulties” but just don’t want to take a chance that they might offend the founder because he might badmouth them so they praise his “hard work” and urge him to keep fighting the good fight.
I don’t do that.
Your time is too precious to waste so if I think you are going down a dead end, I will be bluntly and brutally (albeit politely) honest with you.
Sometimes, that backfires.
The following is an exchange between me and a Dreamit applicant. As background, I had already seen the applicant pitch at other events and knew even before seeing his application that his startup was “not a fit” for Dreamit. His actual application blew past all prior Dreamit records for answer length. I would call his answers “epic novels” except that that implies a logical and narrative structure that was entirely missing. Suffice it to say that, because of this applicant, all Dreamit application questions now have character limits.
It started with this DM:
APPLICANT:
Why didn’t my company get into Dreamit? I don’t like getting rejecting from accelerators, but they keep telling us to apply again. 
ME:
Per your dm on Twitter, you asked for some feedback on why [COMPANY] was not selected for Dreamit this cycle.
You are attempting to create a new social network, something that is brutally difficult in the best of circumstances. In the absence of significant traction (>5000 MAU, and rising fast), there is simply no evidence in the market that you are solving a real problem for a meaningful number of people.
I could probably stop there and end with encouragement to apply again when you have made more progress (as you pointed out that most accelerators do) but I won’t.
I’ve seen you working on this concept for a fair amount of time and, while I respect the hustle and hard work, I respectfully suggest that it’s time to move on to the next venture. You have given [COMPANY] enough time and put in more than enough effort that, if this were going to catch fire, it would have already.
You are clearly passionate about this idea and I know it will be hard to move on – I’ve been there myself and know it first hand – but the longer you continue down what is increasingly looking like a dead end, the longer you are putting off the next idea which might actually be the one to go the distance….
Regardless of what you decide, I wish you the best of luck.
APPLICANT:
Thanks, but I beg to differ and [COMPANY] is much different than any other social network and nobody does things just like [COMPANY]. People may have called Elon Musk crazy to create a new car brand.
Side comment: No one called Elon Musk crazy. By the time he’d started Tesla he’d more than earned his chops. As a general rule, if you are unknown and propose something really out there, you are “crazy” but if you are a hugely successful entrepreneur doing the same thing, you are “bold.”
I believe it’s catching on, and my 13,000 followers on LinkedIn and over 10,000 members is reason to believe. We’re more of a niche network, and there’s no way to move onto something else with all of the effort I put into this. There needs to be a new social networking site as the others do not do a good job. It solves many problems, such as we don’t comment on the photos, less inclined to have bullying. We don’t have people’s information exposed all over search engines like anyone else does. Likewise, our concept brings communities of people together at schools through networks and communities. We have a patent on our tagging and other bigger ideas, so that people can be who they are in photos, which could potentially lead to future job opportunities. We categorize the photos into teams, and we’re building AI technologies to recognize a photo team photo, etc.
I thought we would’ve been great with your partnership with [DREAMIT EDTECH PARTNER].
Many people who join [COMPANY] love my idea! You’re just making up an answer, and I challenge you to find another company you accept in your program that has over 13,000 followers on LinkedIn or has put the amount of effort into a site that I have. We have been challenged to do a lot of great things because we need to raise capital to do them. As someone who worked at Bunk 1, I’m shocked you would say something like this because you know how important camp and team photos are.
Side comment: I’d have responded to him but before I could, he sent me this next email.
APPLICANT:
Your skepticism makes me want to do a better job, not change everything I’m doing. I hope whoever accepts me and [COMPANY] will make you believe in what I’m doing someday. How many accelerator programs are there? You see my point, yours just so happened to get lucky with a few hits, some of which are in social media such as [Dreamit Alumni]. What if someone were to start another accelerator, would you tell them to do something else? You see where I’m headed, the competition is good and fair. There needs to be a new social network and we’re not the only ones doing this. I wish I had no competition, but the way is now there are many upstarts in the social media space.
Side comment: And before I could respond to this, he sent me yet another email….
APPLICANT:
This is a quote I think is great and sums up a hard working entrepreneur. I’m in this to win it. I’ll do anything to make [COMPANY] succeed because I know it will and I fight every day to get new people to join [COMPANY]. I can’t wait till the day I win!
“First they ignore you, then they ridicule you, then they fight you, and then you win.” – Mahatma Gandhi
Side comment: Wait, I thought he was Elon Musk. Now he’s Gandhi? But wait, he quickly sent me a 4th email….
APPLICANT:
Instead of just wishing me luck, can you like my update? I don’t want luck, I want mentorship and growth to my company. That’s why I applied to the Dreamit accelerator. I guess I’ll have to apply again or to another accelerator who will believe in my dream because Dreamit doesn’t believe in the dream as I thought. I’m upset, but if you want to cheer me up, please like my update because I believe in [COMPANY] and what we’re doing. We have a lot of great ideas with [COMPANY] and we’re growing really well!
Please like this update:
Thanks!
ME:
With respect [APPLICANT], you missed my point entirely.
I could very easily have simply wished you luck but instead I gave you my candid opinion of [COMPANY]’s odds of success (extremely slim) and frank advice for you.
That is mentorship. It’s just not what you had hoped to hear… but often that’s what a real mentor does.
You are welcome to disagree – I’m sure Mark Zuckerberg had many doubters too – but at some point you have to wonder, “Maybe I’m not Mark Zuckerberg.”
Either way, I wish you the best of luck.
APPLICANT:
Thanks! Every company you bring on has a slim success rate. What you’re saying isn’t new to me. I know with my work ethic and my idea that I’m bound to succeed. You should only see the billboard I just spent thousands of dollars on….
Side comment: a billboard?!
…I just purchased 50,000 flyers to distribute. We need to grow, and I see [several Dreamit alumni] raising millions after being in Dreamit and think you must be doing something right. Feel my pain, but also realize I work really hard to succeed. I’m inside on a Monday night, turned down a dinner offer to be working and recruiting people to join [COMPANY]. There’s nothing more that an entrepreneur dislikes when you compare them to another entrepreneur. We all know we are not the same people, and you’re not the guy from YCombinator, whatever his name is.
Side comment to Paul Graham: If you want this guy, he’s all yours.
APPLICANT:
Do you know any current business students at [UNIVERSITY]? I’d love to have a new campus representative there who is serious about promoting [COMPANY]. I’m a big fan of [BUSINESSMAN], and know he has a great shot of being the next President of the United States, but figured if I can hire a student from [UNIVERSITY] maybe there could be a possibility his company would be able to sponsor [COMPANY] and this student would be able to succeed as a representative. You see the type of ideas I think about, great things and helping the students succeed in college and their career! I’d also like to make [COMPANY] into a more educational portal over time whereas students can upload the class notes, videos and more for those who want to use it as this. This is more than just a social media platform in its evolution. I wanted to do a lot of this stuff early on, but it’s a lot of work. I think if we can get the next President of the United States, whether it’s [BUSINESSMAN] or someone else behind [HIS COMPANY], we can do some amazing things.
Can you get your [UNIVERSITY] alumni email to join [COMPANY]? I’d love to have some alumni supporters from this school! I’ve been trying to get [UNIVERSITY] on [COMPANY], as I totally believe he’s one of the greatest alumni from [UNIVERSITY]. He’s the guy I believe in, and the guy who I think can make a difference with technology, since he’s been there. A lot of people thought his ideas were not going to work, turned him down at one point, and he was able to break through the rejection and find investors.
I hope you can find us someone at [UNIVERSITY]! That’s the kind of mentorship I need, the connection to the people who can help [COMPANY] grow.
Side comment: No, not Trump. He was referring to someone else.
ME:
I’ve been out of [UNIVERSITY] for many years but you may want to try [OTHER COMPANY]. It’s a startup too that specializes in recruiting campus ambassadors.
APPLICANT:
We are trying to work with [OTHER COMPANY] again. [COMPANY] was one of their first companies and their site was in its early stages, now it’s improved. Are you an investor in [OTHER COMPANY]? I’m also working with [ANOTHER COMPANY] and a Startup with a bunch of [UNIVERSITY] students called [ORGANIZATION]. Looking into another one called [YET ANOTHER COMPANY] which [INVESTOR] from [FUND] invested in I believe. There are a lot of accelerators. Another one emailed me today called [ACCELERATOR]. I don’t think it’s as good as Dreamit though, or they are ranked lower, right? [ACCELERATOR] is also lower ranked than Dreamit, right?
Side comment: I’m redacting a lot of names here but believe me, they are silently thanking me now.
ME:
Not invested in [OTHER COMPANY] but did come across them as an applicant to Dreamit
Know [ACCELERATOR] very well. I mentored with them for several years before heading up Dreamit NY. [HEAD OF ACCELERATOR] is a great guy.
I think Dreamit is better but I may be biased. 
Side comment: If you think you are the accelerator / great guy I’m referring to, DM or email me with the company that this is about and I’ll buy you a drink to commiserate.
APPLICANT:
You’re better, you ranked higher up in the rankings. Dreamit ranked 10 and [ACCELERATOR] ranked ##.
https://hbr.org/2015/03/the-top-20-start-up-accelerators-in-the-u-s
Side comment: While I appreciate a good ass-kissing as much as the next guy, by this point I just want this to end. So I don’t respond… but that doesn’t stop this guy.
APPLICANT:
A high school student messaged me today to invest in his startup. Maybe I should tell him to apply to Dreamit. You might reject him though because he’s trying to build a social networking app. Did Meerkat apply as a social networking app or did you see them as something else and they pivoted into social networking?
ME:
I wasn’t here when Meerkat applied but they were originally Yevvo and then Live On Air before becoming Meerkat so, yes, they went through quite a few pivots before becoming what they are.
Also, I believe that they had proprietary, hard to replicate, technology underpinning their original concept as well.
Translation: “I know Meerkat. Meerkat is a friend of mine. You sir are no Meerkat.” (In case you don’t get the reference)
Some parting thoughts
As you probably imagine, there were a lot of points during the above dialog where I wished I’d simply said, “Competition was extremely fierce this year. Better luck next time!” and been done with it.
But I stuck with it – probably a few emails too long – because I truly felt that this entrepreneur was pouring good time and money after bad, pursuing a venture that had slim enough chance of succeeding even in theory (new social networks make lottery tickets look like good retirement investments) and that, after several years, was absolutely not catching fire. He was emotionally attached to a dead end. As one entrepreneur to another, I felt I owed it to him to help him try to move on.
It’s easy to latch onto to a few glimmers and think you see the light at the end of the tunnel. This entrepreneur really thought at 13,000 LinkedIn followers meant he had traction but we all know that there are some people on social media who will follow a half cooked noodle if it reaches out to them. More generally, anyone can pump money into getting registrations or followers but that’s rarely what really matters. For instance, for a startup like his Monthly Active Users are the metric that matters and, despite his years of effort and money invested, he had fairly few of these.
It’s also tempting to point to all the unique features and patents your startup has none of these mean a damn thing if they don’t fuel usage.
When you’ve poured as much of yourself into a startup for a long time, it’s extremely tempting to write off negative feedback as outliers or as people who “don’t get it.” And yes, there are plenty of those so you do need to stick to your guns for a bit. But when someone who has experience in your field takes time out of his (most likely very) busy day to give you specific and candid feedback when there is nothing in it for him – and especially when there is a fair risk of downside to him from your potentially negative reaction to his feedback! – you need to listen carefully.
And for God’s sake, if someone is telling you that he thinks you need to move on to something else, don’t ask him to put his reputation on the line and introduce you to a lot of people. What’s he going to say to the person you want to meet? “I don’t believe in this startup and I think the founder should kill it but please go ahead and waste your time talking to him”?
So did I learn my lesson? Probably not. When I see an entrepreneur trapped in a doomed startup, I’ll still say something.
But then again, I never claimed to be smart, just experienced. J
Coda: the other company that the applicant mentioned actually did end up applying to Dreamit, was accepted into the program, and is close to closing its round. When asked about this applicant, that founder’s only response was a facial expression best described as “Bruh”
Great Entrepreneurs Are Like Guided Missiles
Note: A version of this post appeared in Fortune magazine’s Entrepreneur Insider network under the headline “The Difference Between a Great Entrepreneur and a Really Bad One”
Great entrepreneurs are like guided missiles. If you point them in the right direction, nothing is going to stop them from hitting the target.
It starts with passion. At Dreamit, we will always back a missionary over a mercenary. Founders who are in it for the economic opportunity will always quit when the going gets tough. An entrepreneur who is driven by the need — not the desire — to change the way the world currently works will stick with it through thick and thin.
Then it takes empathy — not sympathy. The difference between the two is the difference between feeling bad for someone vs. knowing exactly how that person feels. With empathy, a good founder can look at a feature and intuitively know that it solves a user’s problem. An empathic entrepreneur not only knows that something is a problem in his industry, but he can get so far inside the mind of the specific decision-maker that he knows the buyer will look at the service and think, “This is exactly what I’ve been waiting for.”
A great entrepreneur is neither a weathervane nor an anchor. He has well-reasoned but lightly held opinions. There is so much bull**** out there, with so many people pretending to be mentors who have absolutely no business being one. A good entrepreneur almost never adopts advice without reflection. If somebody gives him feedback that is contrary to his current hypotheses, he digs into the reasoning behind that feedback and, if and only if the logic and evidence are good, he changes his hypotheses.
The best entrepreneurs are quick learners and even quicker doers. You often hear them saying things like, “So I taught myself X,” or, “I’ll figure that out.” They love to learn, but they also know when it’s time to tear themselves away from the books and start doing. You never have to tell them to do anything twice, and sometimes not even once. For instance, a potential customer was talking to one startup in the Dreamit program and suggested that the team look into becoming an approved vendor. When they were done, I mentioned to another startup in the room that they might also want to look into it, whereupon that founder turned to me and said, “I’m already halfway through the application.”
Lastly, the best entrepreneurs have failed before. If you find someone who has never failed, odds are they never really pushed their limits.
Bottom line: When you know what to look for, the best entrepreneurs aren’t hard to find.
Wings of Acquire: Using ‘Angel Groups’ to Find Edtech That Actually Helps Students
Note: A version of this post appeared in an article in The 74 Million.
When I first met Adam Fried, superintendent of New Jersey’s Harrington Park School District — and newly-named Bergen County superintendent of the year — he told me, “We want to be a part of the conversation that is happening in the edtech space. For years edtech has been built for us rather than with us.”
Then, a few months ago, Stephen Hodas introduced Fried to Dreamit, which helps launch technology firms in education and other industries globally and which I direct.
Hodas, whose many ventures have included running the Office of Innovation for New York City’s public schools, worked with Dreamit when we first ran a program nurturing education technology startups. When I informed him that the company was launching a new edtech initiative in partnership with Penn State and were looking for principals and superintendents who were, no kidding, seriously interested in working with startups, he immediately mentioned Fried.
“Having an engaged, supportive educator can be the critical success factor for an early-stage startup,” Hodas told me. “Teacher feedback is essential to creating relevant and useful products, but if your model involves selling to schools, then principals and superintendents are the ones who launch your business. Only they can greenlight pilots”
This is what Hodas told Fried as well, but the superintendent wasn’t satisfied with merely advising a few entrepreneurs and implementing a pilot or two. He had larger ambitions.
“I’d spent the past two years bringing in entrepreneurs and empowering my staff — basically doing everything possible to create teachers who are fearless about taking chances,” Fried said. “But ultimately, I’m just one district. And then I thought, ‘What if I were twenty schools?’ Then the entrepreneurs would come to us, listen to our problems, and go out and solve them.”
With that idea and twenty like-minded principals, superintendents, and other school leaders, Fried founded the Northern Ignite Cluster. Its near-term goal: meet every two months with four or five pilot-ready startups capable of addressing real needs in their districts.
NIC held its first meeting in April at Dreamit’s New York office. Four startups currently in our accelerator program (i.e., startups whose businesses we’re helping to develop), along with a company that recently completed our program, demoed their apps and services for the educators.
“The ingenuity and creativity of the apps had real potential for future use by school districts,” said Superintendent Richard Kuder of the Wyckoff School District. “It was invigorating to be a part of the early side of the creative process. I am looking forward to the next opportunity.”
Fried is already looking ahead to how groups of educators like NIC can scale to dozens or even hundreds of members, partnering with scores of startups — and how groups that size will determine which ideas are best.
As we brainstormed possible structures and processes, it occurred to me that there was an organizational model surprisingly close to home: angel groups.
Angel group investing has been around for decades, arising from a time when finding individual investors was more challenging for startups, with the result that investors weren’t seeing a sufficient number of proposals to be confident they were investing in the best. Change “investing” to “piloting” and you have the problem Fried wants to solve.
As angel groups grew to dozens and in some cases even hundreds of members, they did in fact attract many more startups — too many, in fact. The groups developed screening mechanisms to weed out entrepreneurs who weren’t quite ready for investment or who were outside of the sectors that most interested the groups’ members. The process often involved a formal application reviewed by a committee of five to ten members. Only startups who making it through this filter were able to present to the group as a whole.
The possible usefulness of this kind of model to a tech enthusiast like Fried was intriguing, so I introduced him to Mindy Posoff, Managing Director at Golden Seeds — an angel group that invests in young companies with diverse management teams.
Posoff saw the potential immediately. “The power of working within a strong angel network allows you the ability to access a wide range of experiences, perspectives, and resources,” she explains. “In talking with Adam, it became apparent that our dynamic screening, due diligence and investment process could be easily adapted and scaled for his needs.”
With an organizational framework in place, Fried is ready to grow his group. “If you are a district, school or thought leader that would like to be apart of the Northern Ignite Cluster please contact me at fried@hpsd.org. We are looking forward to the future and what this will do for our children.”
Startup CEOs: You Must Change
Note: A version of this post appeared in Fortune magazine’s Entrepreneur Insider network under the headline “How to Get Your Employees to Stop Wasting Time”
Congratulations. You’ve got some customers, you’ve raised some money, and now you’re ready to expand your business.
Now you’re in trouble.
The problem is that the very skills that got you to this point are largely unsuitable to take you to the next milestone. You need to change. You need to dodge hand grenades rather than jump on them.
The startups at Dreamit are all “A teams.” If there’s a problem, everyone raises their hand. Or as one of my partners likes to say, they see a hand grenade and everyone jumps on it. Sometimes they even wind up fighting over who gets the grenade. And even after they have assigned the problem to one team member, the rest of them will probably still end up walking over to that team member with more suggestions.
This is great when you’re an early-stage startup, but once you’re at 10 people or more, it’s just not workable. That team member will end up wasting more time interfacing with the other team members than actually solving the problem. You, the CEO, need to be able to assign the task to one person and have everyone else get out of his way and do their own work. Divide and conquer.
The change, though, has to begin at the top. Of all the un-scalable resources and all the un-scalable inputs in the world, the least scalable commodity of all is the CEO’s time. That’s why large corporations pay armies of people to guard their bosses’ time as if it were gold in Fort Knox. You’re not there yet, but you have to start thinking that way. Yes, you still need to be accessible. And yes, you still need to have your pulse on everything going on in the organization. But if you try to do everything, or even just the most important things, you won’t get anything done. You need to start dodging those grenades.
Start by drawing up a list of all of the important things that you need to accomplish over the next couple of months. Then, item by item, figure out who within your organization can tackle each task. The key here is not to find the person best suited to solving the problem, but rather to identify everyone capable of addressing it. This gives you the most options when it comes to divvying up your resources. If you find that you systematically are out of resources overall or lack resources to attack certain types of problems, then you know who your next critical hire is. Most importantly, your goal is to get as many of those things off of that list as possible so as to free up your time to focus on what’s going to move your business forward as a whole.
At this point, several of you are probably objecting. You’re probably thinking, “But these are mission critical items. I need to nail them perfectly, not just do them well enough.” Truth be told, the number of situations where that’s true is far fewer than you’d think. It’s more important that you focus your attention on growing your business than on resolving tactical issues, no matter how important that specific client is nor what the impact of a particular technical decision might be.
There’s a story I heard in business school about a professor who shows up to class with a bucket. He starts off by putting some rocks in the bucket, filling it to the top. He then asks his class, “Is this bucket full?” The class answers that it’s full. He then takes a bag of gravel and pours it over the rocks in the bucket. The gravel fills in the spaces between the rocks, and the professor turns to ask the class again, “Is this bucket full?” The class, again, seems pretty certain that the bucket is full. He then pulls out a bag of sand and starts pouring that on top of the rocks and the gravel. The sand filters into the spaces between the gravel and the rocks until it reaches the top of the bucket. The professor asks the class again, “Is this bucket full?” The class isn’t quite sure at this point, but ultimately most of them agree that it’s finally full. Then the professor takes a jug of water and pours it on top of everything in the bucket, and it seeps into the sand and the gravel and the rocks until it reaches the top of the bucket. The professor turns to the class and asks once more, “Now is the bucket full?” The class is, at this point, too uncertain to even answer, so the professor smiles and says, “Don’t worry, it really is full now. What does it teach you?”
The students decide it means that no matter how busy you think you are, if you’re smart about your time, you can always fit in a few more things. The professor looks at them sadly and says, “You missed the point entirely. If I’d started with the sand and the water, would I have been able to get the rocks into the bucket?”
The rocks are the big strategic initiatives that move your business to the next level. When your startup is very early stage, the rocks are obvious. In fact, pretty much everything is a rock at that point. But as you grow your business to the next stage, more and more of what you deal with are actually just pebbles and sand. That’s why you build your team up—to take small things off of your plate so you can focus on getting the rocks into your bucket.
No matter how hard you try, though, you will still be so busy that you won’t know what to do with yourself. The difference is that now you’ll be focusing on the things that actually matter.
Your Great New Idea… That Everyone Else Also Just Thought Of
Note: A version of this post appeared in Fortune magazine’s Entrepreneur Insider network under the headline “Here’s How to Know Your Business Is Headed for Disaster”
Something that never ceases to amaze me is how an idea will arise and suddenly come at me from several directions at once. Other entrepreneurs all swear to have come up with that same idea independently, and I believe them—it’s happened to me more than once.
To be clear, I’m not talking about x-for-y variations (e.g., Airbnb for cats or Uber for bicycles). I’m talking about genuinely new ideas. My theory is that startup concepts each rest on a set of memes and technical capabilities. When all of the relevant building blocks are in place, conditions are ripe for that startup concept to be discovered. And with enough really smart entrepreneurs actively and constantly alert for new opportunities, it’s only natural that several of them will come up with the idea simultaneously and independently.
That said, there are some startup concepts that are truly out of left field—that leapfrog a lot of these building blocks. So how do you know if you have a really revolutionary breakthrough or a more garden-variety disruption?
You start by searching. Before you build—before you even model your business in Excel—spend some time Googling up any possible description of the idea you have in mind. In many cases, you’ll find that four or five companies on the first results page are already doing it, and you can simply move on to the next idea.
If you don’t find anything, try searching using keywords that describe the problem you’re solving as opposed to keywords describing the solution you’re proposing. You may find direct competitors that way. At the very least, you’ll better understand how your prospective customers currently relieve the pain point, and you can assess whether you’re a quantum level better or simply an incremental improvement. (Hint: It’s really hard to get attention, much less change user behavior without a clear, compelling, and overwhelming benefit.)
If the field still looks open, go to AngelList and read the short description of every startup in the same sector or sectors that you cover. Yes, read every single one. Every. Single. One.
If you still think you have something new and awesome, go out there and talk to as many smart people as you can, especially if they’re investors or customers on the space.
Don’t worry about them stealing your idea. Most of the people you speak to will never quit their day job, and about 1% will be entrepreneurs with their own ideas. They aren’t going to suddenly look at their startup and think, “My baby isn’t so cute after all. Let’s go steal his baby.” Perhaps one in 1,000 will be entrepreneurs with the right skills, connections, and availability to run with your idea, and it will be immediately obviously who they are. Don’t sweat it.
Instead of worrying about people stealing your idea, ask them to break it. Ask them to tear it apart and show you all of the ways it can fail. And if they can break your idea—and you can’t fix it—thank them. They’ve just saved you years of your life and a lot of money chasing a doomed venture.
If after all this you find that you have something genuinely new, compelling, and unbroken, let me tell you about Dreamit‘s accelerator program.
The Billion-Dollar Startup: You Need This Mindset to Build One
Note: A version of this post appeared in Fortune magazine’s Entrepreneur Insider network. This column answers the question “What are some common mistakes young entrepreneurs make?”
Too many entrepreneurs don’t have it.
The biggest mistake first-time entrepreneurs make is building first and thinking later. They get so excited about an idea that they start building out a grand edifice without first thinking through quick, cheap ways to do so.
For instance, e-commerce sites typically live or die based on customer acquisition cost (among a few other factors). So instead of spending time and money designing and ordering the products and building out a store in Shopify, a potential e-commerce entrepreneur should take a few hours to model out the business in Microsoft Excel, understand what the highest cost per click he or she can afford is, and then set up a Google AdWords campaign. In a few weeks — and for a few hundred dollars — he or she can get a sense of whether it’s possible to get under that threshold. If not, move on to the next idea and save a lot of time and money.
One of the startups that went through Dreamit in 2009 was a blog discovery platform. The team wanted it to be a freemium service, so they modeled out the business and understood that they needed a 1% conversion rate. Anything above 1% meant they had a real business, and anything below that meant they were busted.
They had already launched their free services and had several thousand active users. Their plan was to spend the next two months coding the premium services, and their mentors at Dreamit convinced them to put up a page that upsold the premium features as if they were already built. If anyone clicked the “upgrade” button, they would see a “coming soon” message. Most importantly, they would have the conversion data they needed. They agreed, and in one week they had their answer: 0.1% conversion. Ouch.
They decided to kill their existing business and launch an entirely new startup — SeatGeek — which ended up raising $62 million during its Series C round this past April.
So what do you do when you’ve just disproved a key assumption?
Check the spreadsheet
It would be awful to abandon a promising startup just because a cell reference was off or a formula was wrong.
Check related assumptions
Variables are rarely independent. In the example above, a higher price point can compensate for a lower uptake rate. If you double the price, uptake will drop, but perhaps not as much as you think. It’s easy enough to test.
Check your model
Is this the only way to monetize your service? If you are solving a big enough pain point, someone will pay, and it may not be who you first expected.
Check your emotions
Entrepreneurs need to be persistent. We see a wall, and our first thought is “over, under, around, or through.” But sometimes, the immovable object wins. You can’t “work around” a fatal flaw. Resist the temptation to “table” a business-breaking issue while you solve other, ultimately minor issues. After all, wouldn’t you rather be building a unicorn than gilding a lemon?
As Angels See It 