We have a very fun job. We get to work with startups helping them engineer their products. It’s the best job in the world. From idea, to first funding, to first revenue to a large Series A investment – we get to see an idea turn into a successful business.
Unfortunately, we also see a lot of startups fail. Most of these failures were avoidable as they were a result of believing in some concept, or myth, that is simply not true. It’s almost as if someone wrote a book on what myths to believe about startups that will virtually guarantee failure. Some of these myths clearly come from naiveté and some come from assuming that the rules for developing products in a big company are the same in a startup. Regardless, they all lead to making it much more likely your startup will fail.
Myth #1: All I need is a prototype
This myth is very popular with the inventor/visionary entrepreneur. The plan is very simple, build a prototype, show it investors/customers, and the money will start raining in.
This plan typically fails in two related ways. First, building a prototype, or at least a pre-production prototype, takes a lot of money; and second, in all likelihood, when you show it to investors/customers they are going to say no – despite every bone in your body telling you different.
Most successful startups pivot from the original idea many times before significant investment and/or revenue. These may be small details, or radical departures, but they are all necessary. It’s a myth that you come up with the perfect idea in day one. The reality is that you come up with the perfect idea after months, or years of hard work and that idea is constantly in flux. This work is generally called Market Validation, and may involve prototypes – but they are not pre-production prototypes, they are MVPs (Minimally Viable Products) or PoCs (Proof of Concept) whose primary purpose is to learn about the market, not produce revenue.
Myth #2: I will license my patent and collect royalties
Ideas are not rare; it is execution that is rare. Execution is the ability to turn an idea into a profitable business. A patent may have some use to a business that is trying to keep other companies out of their space. However, a patent that has no revenue associated with it is virtually worthless and to get money attached to the patent, you must execute.
It is a myth that industry is looking for ideas. Industry already has more ideas than they can execute. Any idea that has yet to be turned into profitable revenue is no more likely to do so than any other idea. All pre-revenue ideas are unproven theories. It is very difficult to predict the probability a theory (idea) will work. Most inventors overestimate the value investors/customers will place on their unproven idea.
Getting a patent does nothing to increase the probability that a theory will work. A patent only means the idea is novel. Many novel ideas cannot make money, and most things that do make money are not very novel.
At best, a patent is a minor strategy that may improve margins. It is not an end in and of itself. Without turning the idea into a profitable business, the patent is almost certainly worth zero.
Myth #3: I will outsource product development to the lowest bidder
Nothing is more expensive than hiring a cheap engineer. The old adage that you get what you pay for has been true since the beginning of time. Anyone offering below market rates should obviously be avoided. However, there are subtleties that may not be so obvious about what that market rate should be.
Like any profession, some people with similar titles can make vastly different amounts of money. A very narrowly define technical only person may make $50/hr. Someone with decades of managing successful product development projects who also comes with a team, processes and reference designs may cost $250/hr. Both are charging a market rate – that is, what the market is willing to pay. The question is which one is right for you. The mistake most startups make is assuming the $50/hr is going to be cheaper – nothing could be further from the truth.
Determining what to do and the most efficient way to do it will result in the lowest cost, regardless of how low the hourly rate is for anyone on the team. If we do the wrong thing, then does it really matter how little we pay? If we decide to use an abacus to solve our differential calculus problem, then even at hundred times the hourly rate, the person using a computer will be a thousand times cheaper.
The key is:
- Stay away from too good to be true offers
- Expect high rates for determining what to do – but not very many hours
- Expect to pay a higher rate for determining how to do it – again only a few hours
- Expect to pay a higher rate for a true specialist who will always be cheaper than someone at a much lower rate learning on your dime
- A lot of work can be done at modest hourly rates if they are properly supervised
- Low hourly rates with unsupervised people with the wrong tools will always cost more
Myth #4: I do not need any sales or marketing until the product is done
True believers in this mythology are often technical founders. They recite the mantra of if you build a better mousetrap the world will beat a path to you door. They allocate all their resources to solving technical problem believing this alone will lead to the Promised Land.
The goal of a startup is to find a business model the repeatedly generates a profit. Finding this business model is complex and requires a thoughtful compromise of technology, go to market strategies, identification of customer demographics and psychographics, market positioning, etc. All of these choices are interrelated. Change the go to market strategy and you change the product requirements – as well as everything else.
It’s not very likely that you will know the right thing to do without marketing and conducting market validation. Spending all your time locked in a room, isolated from the real world of customers, vendors and investors, to solve your technical problems is not going to result in success.
Get out of the lab and into the ethos of the industry domain. Use market validation tools to test everything. Assume nothing until you have real empirical evidence to support you belief. Spend at least as much on marketing as you do on product development.
Myth #5: I don’t need to (or can’t) raise money until I have product
We get this one all the time:
Entrepreneur: “I am a startup and I need to develop a product, but I have no money yet.”
Advisor: “Why don’t you raise money?”
Entrepreneur: “Oh, I went to several VC and they said I was too early and need a product, which is why I am here.”
Advisor: “Did you try any other methods of raising money?”
Entrepreneur: “No, what other ways are there?”
Look, if you cannot raise money right now, you will fail as a startup. Raising money is a talent – just like being an artist. If you’re completely incapable of even drawing a reasonable stick figure, you will never be a successful artist. If you cannot raise $5000 from you friends, then you will not be able to raise money from VCs – regardless of having a product or not. Nothing will help you raise money if you have no talent for raising money. If you want to know if you have any talent for raising money, go out right now and try. If you spend six months with an honest effort and come up empty, then keep your day job.
Startups go through several stages of funding:
- 3Fs – friends, family and fools
- Seed – Angels/Strategic/Crowdfunding
- A round
- B round
- And so on
At each of these stages you need to sell your idea and your ability to execute. Investors invest with an expectation that their investment will result in future returns. These future returns depend on your idea AND your ability to turn the idea into a business with a repeatable process for generating profits. Each investment stage has its own nuance, and has an expected level of development. A “B” round investor (typically tens of million) needs to be convinced that you have used the A round money and scaled the business with it. An “A” round investors needs to be convinced that you have a proven business model that can be scaled. A seed investor needs to be convinced that your plan will results in a business model that can be scaled. A 3F investor needs to know and trust your abilities.
Unless you can completely fund the business yourself, or are going to bootstrap, there is no substitute for the ability to raise money. No patent, technical ability or high level connections will save you if you cannot raise money.
Don’t fall for any of these myths. Product development in a startup is long, frustrating and full of risk. To have any chance at all, you need a grounded understanding of what works and what is magical thinking.
Steve Owens, Founder and CTO of Finish Line Product Development Services, has over 30 years of successful product development experience in many different industries and is a sought after adviser and speaker on the subject. Steve has founded four successful start-ups and holds over twenty five patents. Steve has worked for companies such as Halliburton and Baker Hughes. He has experience in Internet of Things, M2M, Oil and Gas, and Industrial Controls. Steve’s insight into the product development process has generated millions of dollars in revenue for start-ups and small businesses.