Entrepreneurs are being hoodwinked and led astray by the very people who are supposed to be helping them. That's my biggest takeaway two years after launching an investment company to take ideas and help turn them into long-term, successful brands.
Every week at Unorthodox Ventures, we meet smart men and women who have graduated from entrepreneurship programs at top schools but have never been taught the basics of manufacturing prototypes or testing products. They think that effective marketing begins and ends with Facebook. Because they've received only positive feedback from mentors and professors--not to mention well-meaning friends and family members--they're convinced they have winning concepts. Their days are spent imagining the perfect influencers to promote their products; at night, visions of acquisition dance in their heads.
Sometimes I feel like the mission statement for my investment company should be "No, Virginia, there isn't a Santa Claus."
Let me explain. A couple of years ago, I sold the company I built from scratch, Big Ass Fans, for $500 million. For many years, venture capitalists and private equity firms had lit up my phone, offering money but little else--certainly not the expertise I craved to help address the challenges of a rapidly growing business. So, when I left Big Ass Fans, I brought some of my best staff with me and we headed to Austin, where we started Unorthodox Ventures. The aim is to help others solve day-to-day problems and build businesses that last. It didn't take me long to realize that the biggest challenge would be dispelling the bad business advice that most young entrepreneurs had come to view as gospel.
It all makes me mad as hell. That's why I welcomed the opportunity to write a column based on what I've learned over decades in business. I started working at age 9 and have never stopped. The goal here is to help entrepreneurs find a less-traveled road, take fewer costly wrong turns, and avoid the biggest potholes--and the hungriest vultures. For each column, I'll draw from pitches that have come through our office and the lessons to be learned from them.
Recently, a couple of very bright college graduates came to pitch a product--a device intended to make students safer on college campuses--that had started as an entrepreneurship class project. Not surprisingly, the pair had gone the textbook route, acquiring mentors and a board filled with PhDs. They had received only encouraging feedback, because who wants to discourage youthful enthusiasm? But when they came to talk to us, problems immediately became obvious.
A couple of clicks on our part turned up a marketplace full of similar products. This wasn't looking good. But when the presentation focused on well-known data about the problem rather than potential solutions, and when we learned that they intended to outsource the manufacturing and that their business plan included Fulfillment by Amazon and advertising on Facebook, we knew we had to inject some honest feedback into the conversation.
We talk to a lot of people who have developed innovative technologies or products but can't get any traction. Why? Sometimes, their work doesn't solve a problem. A flashy presentation might buy you a little time and money from some investors, but ultimately, there must be a there there. Other times, founders get so focused on their solution, they lose sight of the problem. (Staying focused on the problem is critical. Believe me. Before I founded Big Ass Fans, I wasted years trying to perfect a sprinkler solution for cooling rooftops that didn't solve the problem nearly as well as large, slow-moving overhead fans.) If investors haven't pressed you on this point, then they've done you, well, whatever the opposite of "a solid" is.
In this case, the company co-founder and her colleague had identified a problem, but the solution was flawed. The co-founder had passed up a good job to pursue this self-defense project. But it had almost everything going against it, because nobody had taken the time to really critique it. I can imagine the entrepreneurship professor giving the project an A because a lot of effort went into it, and giving A's is easy.
These days, too many "mentors" are nothing but cheerleaders. If it takes a village to raise a child, maybe it takes a village curmudgeon to set a child straight.
Pointing out the problems with this project required genuine entrepreneurial experience, and it was a shame that the pair hadn't been challenged earlier in the game. Instead, the co-founder believed she had something special, and from there had gone on to make more mistakes. Unwittingly, she skipped the hard but essential preliminary work--evaluating the market, determining the sales channel--and went straight to signing on with a contract manufacturer.
Contract manufacturers are a dime a dozen. They'll design and manufacture a product however you want, but most are offshore, and the quality can sometimes be low. If you don't give a fig about quality control, they might be just the answer.
But an even bigger problem is that the contract manufacturer can easily end up owning your property. Before long, it'll be selling the same product for less, and you'll be out of business.
Instead of developing a unique way to sell, perhaps through a network of students, or at the very least taking preorders to judge interest, the entrepreneurs' business plan relied almost entirely on Amazon and Facebook.
Too many founders operate under the delusion that they need to sell on Amazon, and the sooner, the better. The truth is, Amazon doesn't care whether you sell or not, but it does care about tracking your data, and as soon as it sees your product gaining traction, it might find a cheaper supplier. Adding injury to insult, it may continue to pummel you with one fee after another while endlessly beating you down on price.
And, finally, there's the problem of Facebook ads. People are convinced they must advertise on Facebook, that they're losing money every day they don't, that it's the most targeted, the cheapest, the fastest. Facebook may be the Yellow Pages of today, but it's much more expensive. For many products, the cost of acquiring customers on Facebook is simply too high to be sustainable. Sure, Facebook makes it easy, by generating all the analytics and telling you how much to advertise. But it will always find ways to increase its revenue and not necessarily yours.
Every year, entrepreneurs start more than half a million companies in America. Most are destined to go bust because of bad advice--or no advice at all. In the end, the only thing easy about it is the easy pickings left for vultures when entrepreneurs don't get the hard advice they need to hear.
Call me the village curmudgeon. I don't mind. If I can save one entrepreneur from becoming easy pickings, it will be worth it. I'll be back to point out more mistakes in the next issue.