JumpStart: IdeaExchange Blog

Albert Einstein once said “If, at first, the idea is not absurd, then there is no hope for it.” Here is my list of the top ten most absurd and hopeless ideas I have heard about in my lifetime:

1. Coffee shops? The world hardly needs more coffee shops. Plus, coffee shops don’t scale.
2. A Maine-based line of natural products that are made with bees wax? Last time I checked, the “bee” supply chain wasn’t that scalable.
3. Overpriced, finely made historically accurate dolls that will teach children about history? Seriously? I don’t even know where to go with that.
4. An algorithm that will improve upon Yahoo’s web search technology? Fatal flaw: why couldn’t Yahoo just do that themselves?
5. Packages overnight? The infrastructure required to make that happen is prohibitively expensive. Nice idea, but too much capital risk.
6. Growing a technology business in Seattle? Cow town, and too far away at that: investors want to be able to drive no more than four hours from their home. Plus, there’s no entrepreneurial talent in Seattle.
7. You want to trade collectibles and knick-knacks on the web? That’s maybe, like, a $1,000 market on a good day.
8. Your children have an “orphan disease” for which you want to find a cure? OK, so what don’t you understand about the healthcare industry(?): orphan diseases are unfundable.
9. Sell books on the Internet? People want the experience of touching books, opening the covers, being in a bookstore. Sorry, but the need just is not there.
10. You don’t want to develop computers but you do want to (basically) assemble them? There’s nothing novel or even very protectable about that. If you had invented a new microprocessor or something, I might be interested. But just putting the boxes together isn’t going to generate sustainable gross margins.

These are unassailably awful ideas. Every one of them. Laughable almost. I wonder what the poorly thought-out, misguided, ill advised…OK, can we all just agree to call them patently absurd?…ideas of the next decade will be:

• Making cost competitive oil out of algae (been there, tried that; plus, the whole algae industry is too capital intensive, don’t you know)?
• Competing with Google (ok, can you say naïve)?
• Starting a great company in Cleveland (too cold; no talent — seriously: none, anywhere in the entire state in fact)?

I confess that I do not know. But, I have the time of my life working with entrepreneurs trying to figure it out.

(So, the terrible ideas listed above are examples so well known to most Americans — never mind you fair, brilliant readers steeped in innovation history and always seeking contrarian ideas — that they are almost trite. But, to my mind, they bear repeating because they remain stalwart, iconic reminders of how visions and dreams become great companies in spite of a slew of reasonable obstacles and well reasoned protests. In case you didn’t recognize one or two, here they are:

1. Starbucks, founded in 1971 and a market cap of $17.2 billion today
2. Burts Bees, acquired by Clorox for $913 million in 2007
3. American Girl, founded in 1986 and acquired by Mattel Inc. for $700 million 1998
4. Google, founded in 1998 and a market cap of $184 billion today
5. FedEx, founded in 1971 and a market cap of $27 billion today
6. Microsoft, founded in 1975 and worth $274 billion today
7. eBay, founded in 1995 and a market cap of $29 billion today
8. Novazyme, acquired by Genzyme for $225 million in 2001; see Extraordinary Measures, which came out last week
9. Amazon, founded in 1994 and a market cap of $55 billion today
10. Dell Computers, founded in 1984 and a market cap of $28 billion today

Also, it should be noted that angel and/or venture capital investors believed in and invested in almost all of these companies. Each entrepreneur in question was able to get someone, and in some cases numerous someones, to believe in and put money behind the entrepreneur’s harebrained, crackpot — and I mean that with all due respect — idea.)

Becca Braun is President of JumpStart Ventures. She founded and led a number of early-stage companies and organizations, as well as worked as a private equity investor and management consultant. She received her MBA from Harvard Business School and her BA in Linguistics from Harvard University. She is keenly interested in the intersection of wealth creation and broad-based regional economic growth.

I’m back from New York with a whopper flu bug (not swine, don’t worry…), a faux orange Goyard bag and a working knowledge of Twitter. Using Twitter has been interesting, though based on my usage I can’t figure out how the company is ever going to make money. It’s free to sign up. There are no ads on the web page. There are no ads embedded in the tweets that come to my Blackberry. (I signed up for unlimited text messaging from T-Mobile in order to receive all those tweets, so I know they’re making money from me. But how is Twitter, the company itself, going to make money?) If anyone can think of a revenue-generating business model, please share . (NOTE: I realize that Twitter has raised a bunch of venture funding which gives them the luxury of time before they have to show revenue, but they’re in the minority for sure. Here’s a great post from Charlie O’Donnell of Path101 that speaks to the current funding climate and how it’s imperative for startups to figure out their revenue models quickly.)

I’m continuing here the theme of my last blog in which I mentioned a great article featuring “lessons learned” from a failed startup. That blog resulted in folks sending me some similar stories that I’m sharing here. I’m not trying to focus on the negative but, as most people say, there is much to be learned from adversity, perhaps more than from success. This article by Mark Goldenson of PlayCafe features great advice as well as tons of great click-throughs to even more relevant content; this article by Roger Ehrenberg highlights the seven deadly sins that brought down Monitor110; and this blog post discusses the story of Meetro, a failed location-based social network. Maybe Twitter’s management can find some useful info in these insightful pieces, as can you. And if you’re an active Twitterer (Tweeter?) let me know what you think of the service. Better yet, send me a tweet! (@lagries)

Lynn-Ann Gries is the Chief Investment Officer of JumpStart Ventures. She previously worked in the investment banking departments at both McDonald Investments and Smith Barney (now part of Citigroup), and in the sales and trading area at Morgan Stanley. She received her MBA from New York University’s Stern School of Business and her BA in Economics from Smith College. She currently serves on the board of the Fund for the Future of Shaker Heights, the Great Lakes Science Center and Summer on the Cuyahoga (SOTC).

One of the key attributes of many startups focused on an online offering is that you really can make it a long, long way towards your actual customer offering on very little money. This presumes you can either do the technical work yourself or have a close, understanding friend to help out. The other alternative is to get outside help (an individual contractor or firm) but this costs real $$ unless you can craft a way to do it in exchange for equity, presuming you have your company, cap tables thinking and documents far enough along to be able to do this formally. But that’s for a different post! My post today deals with the timing of seeking investment when you are developing this kind of startup.

So, you’ve been able to get your idea down on paper and have at least an outline of a project plan to work against. And, you’ve found that very understanding friend to help at night and during the weekend. Next stop — quit your job? Write a business plan? Fundraising? You’re excited enough about the idea, as are your friends and family — at least enough to convince you to “go for it”. Can that excitement and some mock-ups in PowerPoint get you in front of investors?

Maybe. But that would be a mistake, in my opinion. Given the stage the business is in (really still at the concept stage), most savvy investors outside of friends and family will see a lot of risk still inherent in your deal. My advice would be to keep your day job and get the product underway — as far along as you can while still garnering an income. By this I mean get your web offering developed and in front of real customers so you can both test its appeal as well as test your business model. Google analytics provides a great facility to better understand what visitors are doing as they come to your site. As you gain knowledge from this data and elsewhere (through things like focus groups), you will need to make iterations to your code and site and do it quickly. If you have the bandwidth from a development standpoint, you should be updating your site at least weekly.

These iterations should allow you to connect with your audience in such a way that you can either charge them, charge advertisers, or both in order to begin to see some revenue. If you’ve gained enough traffic to do either, then you may be at a point to be able to secure funding. As I stated earlier, since investors will want as little risk as possible, showing an increase in traffic and your vital metrics will give them hope. One thing that has drastically changed recently, for the negative, are advertising based models. Since the economics of these are such that HUGE traffic is needed to show viability, sites that count on advertising as their only source of revenue will take longer to gestate. I don’t say this to discourage anyone — just to get the point across that it may take more time for these kinds of sites to be ready for an investor to see the growth curve they want in order to be comfortable.

If you can stay lean while you iterate and find that growth curve (it took YouTube a while, after all, before they found their “hockey stick” of growth trajectory), you can make it in the long run. Any time you have an audience that is large, growing and enthusiastic about your idea, advertisers will come around eventually, as will revenue. Twitter is another great example of this, i.e. no real revenue yet but they still manage to garner great support from investors as they work out their revenue model.

It’s all about the product offering — make it compelling, prove it with metrics and with even a small amount of revenue that proves the model, you should be able to find an investor attracted to your “near-proven” idea. These basic statistics will help take a lot of risk out of the deal for them.

John Dearborn is the Chief Development Officer of JumpStart and brings experience as an entrepreneur, founder and CEO at companies across the US and Europe over the last 25 years to the pursuit of economic transformation in Northeast Ohio.

I have coached a number of entrepreneurs during my time at JumpStart and TechLift, and presented to a number of investors while raising venture capital for my company during the worst venture funding climate ever (yes, much worse than today!). From those experiences, it has become apparent to me what most investors do and don’t want to see in the presentation about a potential investment. Although some companies hit the mark (and probably attract funding), it often amazes me how many entrepreneurs miss the opportunity to tell their story in a way that will get an investor interested.

Although there are a lot of “dos” in making your presentation, at the risk of being negative, here are some of the top mistakes that I have seen entrepreneurs make (or have made myself) and how to avoid them:

Going into excruciating detail on the technology - Investors do want to know about your technology. They don’t however, want to do so at the molecular level, or hear about the technology for two thirds of your presentation. Although most VCs are technically competent, they don’t often have a physics or engineering background. You should find a way to describe your technology, products and benefits in a “Discovery Channel” format - simple, clear, yet accurate and truly descriptive in a concise way. Nearly every technology can be described this way; it just takes work and taking a fresh look. 

Failing to tell them how you make money - Otherwise known as your business model, investors need to know how the business makes money, how you get to market and how you entice customers to come your way. Software and internet companies often struggle with this. If you have a SAAS model, are depending on internet advertising, are planning to sell direct, or use distribution - tell them! If the particular model you are using gives you a unique advantage- tell them. Even if your model brings some difficult challenges, talk about them. If the investor feels the need to ask you “How do you make money?”, things are already going badly.

Giving detailed five year financials - Do entrepreneurs really think that investors believe their projections for travel costs in the year 2011? Not only do they not believe that, they are heavily discounting your revenue forecast! Investors want to know the high level financials - your projected revenue, your projected gross margin, how much cash you need to develop the business. Leave the detailed, unreadable spreadsheets out - there will be plenty of time for them in due diligence or later. 

Not bragging - Investors generally feel that the management team is the most important factor in a venture investment. Despite this, many entrepreneurs are reluctant to tell them why they are the best people possible to bring their great idea to fruition. I once coached an entrepreneur who had an MBA from a top ten school, and didn’t want to include it in his presentation, because he thought it would be pretentious! Tell investors about your educational background, your market experience and definitely your entrepreneurial background. You are the only person who can possibly brag about your accomplishments, abilities and potential - don’t be shy about doing it! 

Not describing the “special sauce” - If an investor says “good idea, creative, but easily copied”, the deal is gone. You need to convince an investor that your approach is unique, or that your advantage is sustainable over the long term. They would like to know how you can protect their investment with patents or trade secrets. If it is easily copied, they want to know how you can “run faster” than the competition, based on savvy, unique capabilities or other factors. If it is “me too”, venture investors aren’t interested. 

Failing to create the “Oh wow!” moment - If you can get an investor to say to himself or herself “Wow - if they can do that, this is significant” or “I LOVE this idea”, you are well on your way toward a potential investment. You have to create a story that does this for the investor. Paint the picture of the problem you solve, how your product solves it better than any other alternative, and how the revenue potential is huge. 

Avoiding these mistakes won’t guarantee you an investment, but making one or more of them will certainly prevent you from getting an investment. Don’t make the same mistakes I and many other entrepreneurs have made. Learn from the mistakes of others - and make that killer investor pitch!

Chris Mather is the President of JumpStart’s TechLift business unit. Previously, he managed a number of technology initiatives in Northeast Ohio for NorTech. Before entering the economic development world, Chris ran a number of technology companies in Northeast Ohio and New England, including Ion Optics Inc., where he raised $6.7 million in venture capital, and Apsco Inc. and Gould Instrument Systems. Prior to that, he spent 13 years in sales, marketing and management roles with Hewlett Packard after graduating from Worcester Polytechnic Institute with a BS in Electrical Engineering.