Engineers see opportunity in their customers' problems. How can the technologically gifted, but not necessarily business-savvy, engineer judge if a nascent opportunity is fundable and feasible? First, make a business plan.
Business Plan 101
In our assumed scenario based on a founding team of technologists, the product is likely to be the strong point, but other aspects of the plan will require more thinking. It is likely that the VCs will not read the business plan, though it is important to them that the entrepreneurs took the time to think through all chapters of the business plan.
An interested VC is likely to focus on the spreadsheet that details revenues and expenses projections, and question the assumptions underlying the numbers. This is where the investment in the research for the business plan will pay off. Crisp answers based on a deep understanding of the market and the technology is the only way to get the attention of a venture capitalist in that long-sought meeting.
Another important revelation that comes when developing the business plan is that the founders realize what they don't know and where they need help. This help will come mostly from drafting complementary members into the founding team who add the required skills or through consultation with mentors and advisors.
Finally, another benefit from the business plan process is that it forces the founding team to tackle the sticky issues. Core among those is the ownership share of the team members, a difficult negotiation but one that must be addressed upfront. If left unresolved, it is a red flag to the venture capital firm that the team has not jelled.
A word of advice: All stock options should be based on a vesting schedule. A fledgling startup team doesn't want to discover after three months that one of the founders is a misfit and needs to be removed but owns 20 percent of the company.
I'll close with a list of questions from the entrepreneurship class at the University of California at Berkeley's Haas School of Business. Any budding entrepreneur who cannot answer those questions in a positive way should pause and rethink the product and company concept before diving into the startup world.
- Is there a burning need?
- Is the market big enough?
- Can you maintain a sustainable, differentiated positioning?
- Is the business model scalable?
- Right time?
- Right team?
In my next blog, we'll look at launching the product.