Street-smart advice from the capital-crazy world of venture finance
Posted by William on July 22, 2011
At a time when the Internet seems to have changed nearly everything about the fundamentals of business, one rule remains a constant in this booming, gold-rush era of the startup – people. You need fabulously bright, driven individuals who understand the industries they are trying to tackle. Some bring that understanding to the table when they start. Others gain it after they dive in. But people are the heart and soul of truly successful companies.
At the entrepreneur’s disposal are three prime levers of opportunity: instant, free, global access to information, now in the hands of more people than at any time in our history; potent tools of innovation, enabling anyone with a PC to start a business and obtain instant reach; and free access to capital from investors more willing than ever to bet on new business models. All three work together in breeding business opportunity in every corner of every city in the world.
Of course, the ultrabright future that the Internet promises entrepreneurs with billion-dollar dreams can blind as fast as it can bless. From the weary perspective of a Silicon Valley venture capitalist buried in stacks of unread dot-com business plans, a few rules for steering that startup down the online road:
Major league models demand major league funding
You can’t launch a consumer Internet play in a big category with the kind of financing that was typical of a startup just three years ago. Gone are the days when you could raise separate rounds of $2 million, $5 million, and $10 million. Face facts: Building a brand on the Net is a $20 million to $40 million proposition. If you want to join the race, you have to keep pace.
Be willing to bet the farm
Four years ago, entrepreneurs could launch a software company, build a product, get customers, grow the sales force, and build a big company. The plan would be to grow the revenue to $25 million and then go public; everyone was happy. Today, thanks to the Net, startups move at lightning speed. To compete, you must be brave enough to bet the farm first – and trust that you know your market well enough to convert it into a profitable business. You have to dare to be great.
Stake claim to a new market and drive its evolution
Stake claim to a new market, then execute flawlessly. Look at Drugstore.com and WebMD – both betting big and betting fast that they can own their respective markets. What does it take to own these categories? Lots of money, a vision of where the market is going, a commitment to own mindshare, and a conviction that you can drive change yourself.
Tomorrow is different than today
Don’t expect that what worked yesterday on the Net will work today. Too many startups fall into a common trap – believing they can do what Amazon did. Forget it. The competitive landscape is completely different. Innovations such as one-click purchasing, personalization, building deep content, and fostering communities are now prerequisites, no longer innovations. Darwin lurks everywhere on the Net, and doesn’t ever let startups rest on their laurels. Your competitive advantage shrinks every day.
Focus on your business and the future
Lots of vertically focused companies think they can replicate their business model in other verticals. There are companies in each vertical market thinking the same thing about your market. Stay focused on building deep value in your vertical. Also, one company’s business is another company’s customer-acquisition strategy: Make sure your business isn’t rendered irrelevant by a company in a different market offering your product or service as a marketing device. How long will it be before UPS gives away hosting and ecommerce solutions just to get the shipping business? Keep your head up and don’t blink.
Bank on fundamentals, not anomalies
After the collapse of the Soviet Union, the Russian Mafia gained prominence in a chaotic new world. It isn’t an enterprise that’s likely to last or dominate the Russian economy, but in first days of a new world – such as the chaotic dawn of this new economic millennium – random models and systems emerge that seem powerful and sustainable, but clearly are not. Many Internet startups have become wildly successful merely on account of launching a new model and having supportive capital markets for the short term. Market anomalies don’t last. Entrepreneurs should focus instead on fundamental business models that offer sustainable, competitive advantage over the long haul.
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