Startups: That ‘Next New Facebook' is Great, But Market Acceptance Will Result in Funding

Very few startups are successful at getting funding right out the gate. Some recent national analyses suggested that only 3 percent of startup deals looked at by angel investors ended up raising any investment (Angelsoft, a.k.a. Gust).

Of course, this begs the question, “What is a startup?”

For our purposes, and based on my four and a half years of experience with Innovate Arkansas, I am defining a startup as a company that is pre-revenue earning, and one that may have received funding for product or concept improvement from public grants (federal SBIRs or STTRs, or quite possibly state technology awards) or private cash support from family members or very, very, very good friends.

With this definition, I estimate that 70-73 percent of the IA client case load is comprised of true startups. Another 15-20 percent of the clients has graduated to middle-stage, small businesses that have begun to receive some consistent revenue flow and are concentrating on increased customer development through product improvement and sales.

The final grouping of late-stage clients, that range from 7-15 percent, are experiencing steady product revenue flows and are concentrating on growth, improved management structure and ultimately a more significant market position.

Raising investment financing is difficult because it requires a “reality leap” in an inventor’s or founder’s thinking; the technology founder has to understand that investors care less about how neat or different a new product is and more about how the new product will make money.

As Innovate Arkansas works with startups, it stresses customer development as at least equal in importance as is product development.

It is, after all, customer development or acceptance that leads to new and recurring revenues.

Too often, technology developers concentrate the majority of their time on perfecting products, ever tweaking that “next new Facebook” or that must-have new app. And when finally they are finished, they approach investors for that infusion of $250,000 to $500,000 to enter the market, yet with no sign or hint of customer acceptance.

The result is predictable. Investors want to see a market awareness of the need the technology product is meant to address, and when they don’t see that, no investment gets made. The product will die on the vine; the startup opportunity will be lost.

So, how does the investment financing dilemma get resolved?

First of all, startup founders have to understand they are not in a sprint. Starting a business, one that attempts to be regional or national in its customer scope, takes a good deal of time and effort to develop.

To the developers of the “next big thing,” Innovate Arkansas stresses the need to fully understand the problem or need being addressed.

What are the assumptions the developer is making as he or she is proposing the new product or solution?

And even more importantly, how are the assumptions being validated, and by who? It is at this very early conceptual stage of a new startup company that product development and customer development must be thought of as one and the same.

Who is better able to validate a need or a problem in the marketplace than the customer for whom the product is being developed? From day one, the startup founder should be looking to the product end user as his or her justification source of a problem or need.

Founders have to look to someone other than themselves to define market needs. This step will help convince investors that a new startup can add value in the market.

(Tom Dalton is director of Innovate Arkansas, a program of the Arkansas Economic Development Commission and Winrock International.)