This article was originally run in the Union Leader on May 20, 2024
Author: Roy Wallen, CEO, Directional Healthcare Advisors
Startup 101
One of the biggest challenges in starting a company is determining the amount of – and then raising – capital needed to actually get started. Founders with previous experience in establishing a company and executing a successful exit may have the funds for a new venture. Other sources of capital may support a founding entrepreneur and obviate fundraising. However, for most of us, presenting our ideas to others that do have capital is necessary to get started – or, at least, continue past the early stages of company formation. Knowing what and how to present to potential investors and lenders is at least as much art as technique.
What problem?
One risk inherent with the enthusiastic founder is being subjected to the notion that the product, especially if it has unique technology, is intuitively obvious. This may be true to you who have invented, lived with, labored over, and brought to light a new thing. It is not obvious to others who are outside your field and, usually, is completely foreign to those who might invest in your venture. Therefore, the first step is to describe the problem you are solving and to do it without the use of jargon or complex technical descriptions. This is often stated as a pain point that you are alleviating for your potential customer.
What solution?
Once the problem is identified, describe how you are addressing that problem. Your approach should be new and compelling. In some industries, there are specific ways to describe how you are alleviating pain such as a collision avoidance system in cars, shorter wait times in the doctor’s office, improved access for some people with disabilities, increased throughput on a manufacturing line. The best way to know how you are solving a problem for a potential customer is to go and talk to that customer. You may have a cool idea but if it won’t fit into their routine and solve a problem they regularly face, adoption of your cool thing will be compromised.
How big is the problem?
If a relatively small percentage of the population has the problem you are solving, the market is limited and the investment will likely be unattractive. Typically, market size will be characterized by total available market (TAM), serviceable available market (SAM), and serviceable obtainable market (SOM). Say you want to provide collision avoidance systems for cars. The TAM is the total number of cars in the world or 1.4 billion. However, if you can only reasonably service the US market, the SOM is 290.8 million. Of the US market, if you can only implement your collision avoidance system in cars sold since 2020, the SOM is 12.7 million. If you multiply the number of units in each market category by the price/unit, that will give you the market size in dollars. Suggesting that your $1000 collision avoidance system represents a trillion-dollar opportunity will immediately undermine your credibility.
What competes with your idea?
We all want to think that our innovation, especially a technology innovation, is unique. However, potential customers have been living without your innovation for at least some period of time, probably a very long time. To suggest that there is no competition will also undermine credibility. Competition comes in different forms and may not be an alternate technology; it may be an alternate method or way of doing things. Back to our example of collision avoidance, how are drivers currently avoiding collisions? Something as simple as driver attentiveness is a competing method. Blind-spot detection is another method based on some technology. Again, knowing how your customers operate in their current environment will give insight into competing methods and technologies.
Why this team?
Investors will most often choose to invest in a strong team with an exciting idea. If the exciting idea turns out to be not so exciting, the team can recognize the need to pivot to another idea or another direction. The adage is to invest in an A team with a B idea over a B team with an A idea. Founding teams may start with an individual or group that has specific expertise. However, technology development alone will not determine the success of a company. Maybe a technical founder needs to hand operating responsibility to someone with stronger marketing or business leadership. Maybe managing the financial strength of a company requires the leader to have strong financial management experience. Over time, the enterprise may shift its focus from technology development to marketing – team leadership may need to shift with it. The key message here is to describe why this team will be the one to succeed – and team includes advisors, mentors, and affiliated organizations so identify them.
How will you (and your investors) make money?
Present a strong economic model with a heavy dose of realism. It is foolish to suggest you will address a trillion-dollar market and capture 20% market share in 3 years. It is equally foolish to suggest you can charge $10,000 for an item when people are currently spending $100, no matter how good or cool your technology is. A solid financial model will show your projected cost of goods as compared to your selling price. Other costs such as marketing, sales, and administrative overhead need to be covered. Finally, identify how your investors will see a return on their investment through a sale of the company to an acquirer, issuance of publically-traded stock, or dividends to shareholders.
Other strengths and hurdles
Patents, regulatory requirements, pending legislation, economic factors, or demographic changes can have an impact on a business. Some of these are positive and accelerate or strengthen a company and some could slow it or bring it to an unfortunate end. Identifying strengths and how you will protect them as well as risks and how you will mitigate them shows a realistic approach to funding and building a company.
What are the key take-away items?
Once the story has been told, leave your audience with the key elements of the business. These should include why this is a compelling problem that needs to be solved, why your solution is superior, why your team is the one to make it happen, why this is a good business in which to invest, and how you will be both offensive and defensive in building the company.
Next steps
Seek help, lots of it is free. Practice the pitch, starting in a friendly environment. Tune your pitch to the audience (each one is a little different). Listen and learn from those with more experience – then adjust and adapt. Have fun (though it is hard work).
About the Author
Roy Wallen is the CEO of Directional Healthcare Advisors, an international advisory services firm specializing in commercialization of healthcare technology that works with (mostly) startups. He also serves as coach and mentor to startup founders and as occasional judge in various competitions, incubators, and accelerators.
