So you got your first investment...
Congratulations! You can hardly believe it, but after heaven knows how many tedious sessions with incubator managers, venture capital types, angels, lawyers and the rest, you actually got someone to believe in your idea and give you some money. Here’s the catch…. It’s not going to last for long. If you haven’t figured it out by now, your pre-seed investment should be just large enough to allow you to start building a team, prove your technology, validate the market and define a product. These are huge tasks to carry out with less than a million dollars, so get cracking.
The sad truth is that most incubator projects fail to raise significant money and become large companies, but rather wind up as "portfolio zombies." These are typically able to raise small follow-on amounts from existing investors or occasionally even from second tier venture capital players and end up dying a natural death. At best, they are sold for a pittance. Why does this happen? How come those technologically interesting ideas fail to become viable companies?
Two culprits are usually to blame
Team Team Team (and you can say it a few more times)
This is by far the most important factor and unfortunately the one most often mishandled by entrepreneurs and incubator managers alike. If you do not have an experienced, well-rounded team by the time you are starting to raise the first significant round, you will most likely fail. By well-rounded I mean you should have a core team experienced (at least) in business, product management and R&D project management. Having good technologists on board is just not enough.
Failure in this respect usually occurs because the company is not interesting enough to attract good managers, either because it doesn’t have enough money to pay them or because they can’t relate to the value proposition. There’s no real solution to the money problem. It can be partially addressed by giving significant equity and by deferring compensation. However, you’ll find that if an idea is appealing to people, they become more flexible in their demands. The real answer then is to work on passing your idea off as interesting to serious people.
...Which brings me to the second culprit….
Think business and not technology
Many incubator companies spend all their resources on making their core technology work, forgetting that unless someone finds a use for it, it will be worthless. The effort going into identifying a product and finding out who will pay for it should be just as significant as the effort put into developing the technology, if not more. Don’t fall in love with your original product idea. Go out, test the market, see how it reacts, and change the product definition according to the feedback. When going through this exercise, it is crucial to meet customers in your target market, which is usually not Israel. Don’t save on getting to the right people. If it requires you to spend a significant part of your budget on matchmakers and flights, then so be it.
While companies are not usually expected to complete their incubation stage with a working product, they are expected to have a solid product and market definition. If you are unable to carry out this exercise by yourself, get help. Do not expect the incubator management to do it for you. Find the right partner (see previous culprit) and start working.
A few more words of caution…
Choose your investors wisely
Many fresh entrepreneurs are so excited about the fact that someone is willing to entrust them with a large sum of money that they forget to check with whom they are getting into bed. Ask yourself the following questions: Does the investor add value beyond dollars and cents? How will they be able to help you when it’s time for the next round? Are they credible? If the answers to these questions are not satisfactory, do yourself a favor and hold out for a better investment – even if it means less favorable terms or a delay. A bad investor can do more damage than good.
Choose your co-founders wisely
Beware of those trying to hitch their wagon to your star. Loads of "friends," family members and other "good souls" will try to attach themselves to the burgeoning entrepreneur and offer their services in various capacities. If you are inexperienced, it is tempting to listen to the advice of an acquaintance that seems savvier. Very often you’ll discover that this so called "expert" doesn’t have much more experience than you. Worse, yet, some people are "red flags" to investors. Affiliating your venture with them can be deadly! These "red flag" types are often people with seemingly impressive resumes. It is advisable to perform some serious due diligence on potential partners. For example, if you have access to people in the VC industry give them a call and try to ascertain what they think about the person.
Finally, the best advice I can offer is to find a mentor that you trust and who is really business savvy. While this is a difficult task, it is probably the best way to steer clear of “the pre-seed valley of death."
(Reprinted by permission from the Dec. 2006 issue of IVC Journal)
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