“Here’s my advice on moving from idea to startup,” I answered.
I was just leaving the Thursday lunchtime Bible study at the Atlanta Tech Village. While in the hallway on the way to the lobby, he called to me, “Hey, Charlie. I have a question.”
Rob is a brilliant young man, Christian, and programmer for a fast-growth startup in town. He’s got the startup bug and is thinking about starting his own company. Because this was an impromptu meeting, I didn’t have time to hear his idea. He had to get back to work, and I had to get to my next meeting.
Rob said, “I have an idea I’m working on.
“I am creating a product which I believe can be the start of an exciting company, but I am not sure how to get funding for the idea. What are my next steps?”
First time entrepreneurs seem to believe you start a company and you get funded.
“You have five gates you have to go through before you can talk to angel investors. Until you successfully pass through these gates, by my experience, you’ll waste a lot of time talking to angels and come up empty.”
“What gates?” he asked.
Here are the five gates from idea to startup and how I described them to Rob. This is the short version because we only had a few minutes together. I’ll expand on these in separate articles over the next few weeks.
Gate 1: The problem – What is the problem which exists in the marketplace apart from your solution? The problem must be clearly identified and defined. Don’t allow your solution to bias the problem definition. The problem was there before you even came up with your idea.
Gate 2: The customer – Who has the problem? Somebody has to own it. If there is a problem but no one claims ownership, there is no clear buyer. No clear buyer and there is no one to talk to who even cares about what you are selling.
Gate 3: The test – Is this a big enough problem to get the person’s attention? When you find the person who owns the problem, you need to find out if they want to solve it. We all have problems in our lives which we can address if we cared enough, but in many cases, we just live with the problem.
Gate 4: The economics – How much will the person pay to solve the problem? Every problem has some level of economics associated with solving it. Here are the two ends of the spectrum. If the problem threatens my life, I’ll spend whatever I can afford to solve it. If it is a problem which causes an inconvenience, I’ll spend little to nothing in solving it. As the entrepreneur, you need to be clear on the value of your solution to the prospective buyer. It is not what you think it is worth but what the buyer is willing to spend.
Gate 5: The decision – Based on what you discovered in this investigation, do the economics work? The entrepreneur must ask, “Can I provide the solution to the problem and ultimately build a profitable company?” This is where the rubber meets the road. If you can build a profitable company, go for it. If not, go back to gate one.
These are the gates the entrepreneur must pass through to get to a viable startup. The initial investment in the company must, therefore, come from the entrepreneur.
Investors, particularly angels, invest in businesses rather than ideas.
This means you have to get to gate five before selling stock in your company. The process of getting through these gates is necessary to test your commitment, passion, and understanding of the market you intend to address.
I have been working with early stage entrepreneurs for the last 25 years. I’ve invested in ideas and almost always lost my money. But when I invested in a business, I’ve almost always made money.
As an entrepreneur, you will get the best value for your business when it is deemed by an investor to be a business and not just an idea. As the entrepreneur, this process will be financially and emotionally draining for you. But this is what it means to be an entrepreneur who is investor ready.
I ended the conversation with Rob by saying, “Focus on defining the problem in the market. In other words, go back to the first gate. When you get through gate five, you’ll have a business people will be interested in.”