The Seed, The Early And The Ugly

It's OK to be a solution looking for a problem, just find a big problem

I just met yesterday with a promising startup that has such a typical problem that you should be aware of it and not run into that trap.

Most entrepreneurs dream up something high on their cool-meter, and if you are a techie (bless your brain), you will discover some really beautiful technology by mere osmosis with your work and play environments. And now what?

This is where most people start to look for a problem to solve. And most of the time, the success of an idea is really not (just) the technology discovery but much more importantly the problem that the technology will solve. Budding entrepreneurs usually trip and fall here. Some samples of what VCs hear most of the time:

1. It is so great that success is obvious (yeah right)
2. You're not smart enough to understand the technology so how can you understand the g-normous problem that it solves (yawn) 
3. This technology can be applied everywhere (sure, just scrape it off the walls and take it with you on the way out) 
4. Look at all those markets this can be applied to! We will win everywhere! [insert here sweeping hand gestures that drop the coffee cup on your new carpet] 
5. We will start with this small market and then I am sure we will find something that we just cannot imagine right now (I call this the Barney Market - from the purple dinosaur in the (in)famous children series, said purple creature always encouraging kids to use their imagination)
6. We will dominated this $100M market (translation: my revenues will tightly hug the few $M line and will never get over $10M)

VCs are looking for a credible scenario for you to get to $100M revenues, because that level triggers all kinds of goodies like an IPO (remember those?), or a nice juicy M&A. This means that you have to find a $1B problem, and then state with utmost confidence that you will get 10% of the market.

So, just like you need two electrons to make a covalent bond, you need a groundbreaking technology coupled to a $1B problem to make a startup that has a chance of getting funded.

The Corporation Giveth, But It Also Taketh Away...

This week has brought two examples of the agony of defeat for entrepreneurs. Both cases involve a round of financing lead by a corporate VC.

In the first drama, this technology startup is inking a scrumptious deal with an industrial partner that, in exchange for a technology license, will invest a significant amount in the startup at an equally significant valuation. After months of agonizing fund raising, you can only imagine the relief of the management team. With the company offices suffused with this new sense of optimism, the team - not without some guilty pleasure of giving back some of their frustration to the VCs - promptly rejected a VC lead term sheet that was promising a fair but clearly lower valuation. Alas, a few weeks after their peremptory refusal of the VC term sheet, their industrial partner has a sudden change of heart, and now the startup is back to square -1.

The second drama follows the same familiar scenario. Our Cinderella startup, after years of toiling in the technology kitchen, is about to reap the reward of a good round of financing lead by a corporate VC. Good plans were drawn, good people were prepped and ready, with visions of twinkling treasures lifting people's hearts. Alas, right before the GPS satellite signals the local midnight, the corporate prince declared that cash is now King, and since the startup cannot promptly produce any ounce of royaltiness, the investment was summarily cancelled, and our Cinderella is back to living from specks of largesse from our Small Business Administration.

This two tales highlight a simple truth: corporate VCs are just too unpredictable, because they have too many cooks in the kitchen. Remember that when cook #1 (the person you are discussing the investment with) acquiesces to a deal, several other cooks can at any time override the whole thing (including that Big Enchilada CEO sweating over his bonus). Yes, VCs sans corporate may not give you the highest price, but they are much more dependable to close a deal, and to support you in the long term.

Until next time, happy chasing!