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I'm the first to admit: I'm a sucker for entrepreneurs. When I find one, I have to hear his or her story. Last week I was having coffee with this guy who was telling me about this idea that he and his partners have. I love those meetings when you're sitting with people who can see today a future that will take most of us years to come to grips with. Unfortunately, this was not one of those meetings. It's not so much that the idea wasn't original, but that just as I was getting into his story, he caught me off guard and did the 5% shuffle. The 5% what? Allow me to explain with a short story.
July 1999. I was invited to join a meeting between a software startup and an angel investor. The investor in question had a checking account the size of a small country's GDP and was looking for something exciting to get involved in. We met for coffee in the lobby of the designer hotel he was staying at, talked a bit about the weather, and took a limo to the software company's offices. After introductions we sat down and the CEO began the presentation.
At first, things seemed to go well. Then, after about ten minutes, the CEO reached slide #5. On it was a big pie chart with a small piece taken out for emphasis. "The worldwide market for life-science chemicals is $15 billion. If we capture 5% of that market (dramatic pause), none of us will have to work again."
Before the CEO had a chance to move on to his next slide, the investor closed his notebook, got up and left. No one said a thing for the next two minutes. It took me that long to realize what had happened, so I'm not sure how long the management team stayed in silence after I left.
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"Before the CEO had a chance to move on to his next slide, the
investor closed his notebook, got up and left." |
I caught up with the investor back in the limo. "What happened to you? I thought you got lost," he chuckled. I didn't know what to say.
"You think I lost it up there, don't you?" he asked me after a few moments of silence. "These guys will never make it, you know," he added in a somewhat frustrated tone.
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"These guys will never make it, you know" |
"How can you tell so quickly?" I demanded. I knew this guy had experience, but we were in the room for less than fifteen minutes. How could he seal the fate of this company in such a short time?
"Have you ever seen what 5% of anything looks like?" He asked. "Have you ever taken 5% out to lunch? Asked it what it loses sleep over? Figured out what its growth strategy is? The guys in that room think that 5% of the market for life-science chemicals is their market. Well that 5% doesn't exist—not as far as a young company is concerned. When I invest in companies I want to know that management can explain a day in the life of a customer. I want to know that they have an intimate understanding of what the customer's budget looks like. What their buying process looks like. Markets don't buy, people do. If these guys are talking about 5% of the market at the phase they are in, do you really think they stand a chance?"
They didn't, and not long after this meeting the company folded.
So the next time you're looking for money, don't aim for 5% of the market and don't confuse markets with budgets. Budgets are where your customers are going to get the money to buy your products and services. If you show your investors how big those budgets are, how many of those you can attract in the first two years of operation, and why these budgets will go your way and not the competition's, then you'll do just fine. |
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