Unlimited, October 2004, by Andrew Janes
What does it take to get a VC or angel investor really drooling over your business proposition?
You need three essentials: a novel idea, a burning customer need and the right people to make it happen.
Some VCs stress the importance of the product and others are more interested in the people they are investing in. But a common theme coming through from almost all the investors interviewed by Unlimited is that early-stage Kiwi companies don't do enough homework on the market: their competitors and potential customers. Instead of coming up with a great product and then thinking about the market, they say, companies should be looking at customer needs or gaps in the market and then coming up with products which meet that demand.
"I often hear people say, 'I have no competition'", says Endeavour Capital's Stuart McKenzie. "That's because they are not looking at things from a customer perspective. Your competition could be the old technology you are seeking to replace."
Direct Capital's Ross George: "With new companies, we always ask them who will their first customer be and in what month will the product be sold. That's a really good discipline for companies to have thought through."
Tightly defining your market is also crucial. Rather than going for a miniscule portion of a large market - the so-called China syndrome - McKenzie says it's better to identify a niche within that market and go for a large chunk of that. "You want at least 30% of the market you are targeting."
Owen Scott, formerly a senior executive at the granddaddy of Kiwi IT firms, Christchurch-based Jade Software, left his job in February to set up Concentrate - a company that provides marketing advice to Kiwi tech firms. He laments the lack of thinking about marketing fundamentals by early stage companies here. "I was presenting a seminar to around 35 early stage companies the other day and I asked them how many had defined a priority market," he says. "Only one person stuck their hand up."
As an example of how early-stage companies should be thinking about their market, Scott recalls how Jade scoped out the US market. The company initially looked at the entire US market: too big. So it then identified around 400 companies, mainly large corporates, using Linc, the mainframe programming language developed by Jade founder Sir Gil Simpson. The idea was to convince these companies to convert to Jade. Executives then worked out that those 400 companies were upgrading their software every four years on average. That meant Jade would be marketing to 100 companies per year - a manageable target.
Finally, no matter how great your product is, you're going to have to be able to sell it. If you can't sell the idea to a VC or angel investor it's unlikely you'll be able to convince a real-life customer.
This is especially important for people with a technology or science focus who may have difficulty making a business case. "If the sales pitch is too complex then people say no," says Ross George. "You need to have a really simple sales pitch about what your product does for the customer."