From Jan Andriessen – henQ (@JanAndrssn)
When I talk to start-ups that might be eligible to receive henQ funding, a lot of founders seem to find my focus on their business case annoying. When I ask them about their view on the market size for example, or on sustainable competitive advantage, their eyes roll and they seem to be thinking: “this guy really doesn’t get what I’m doing.” And a lot of them actually specifically say that it is non-sense to think that far ahead with respect to competitive advantage, or to focus on market size. Because being an entrepreneur is not about talking or thinking, it is about doing, right?
Below I’ll explain, based on three common misperceptions, why entrepreneurship indeed is largely about doing, but that doing is only useful within the context of a well-thought through business case.
Misperception 1: Sustainable competitive advantage is something to worry about later
Entrepreneurs seem to dislike thinking and talking about sustainable competitive advantage particularly much. Not just because it is a very abstract and difficult concept, but also because it is something that they’ll only be able to capitalize on 5-10 years from now. However, if a business does not have an advantage that will give it a lower cost base or enable it to charge a higher price than its competitors, its profits will eventually decay as many competitors that offer a similar product will emerge. As an entrepreneur, ask yourself the question: do I really want to spend ten years of my life building a business that has many competitors and yields no profit? That’s what will eventually happen to any business without a sustainable competitive advantage!
Misperception 2: Market size is just another box to tick with investors
Market size as a fact is particularly hard to prove. Founders sometimes seem to dread my questions about market size because they fear a discussion about ‘key assumptions’. Or perhaps they suspect that I would like to get an exact number so I can tick off another item off my VC checklist. Nothing is less true. Any exact number on market size that claims to have a factual basis is total non-sense. But building a business in a market where you have never performed a proper Toothbrush Test (you can Google this one yourself) is even bigger idiocy. As an entrepreneur, ask yourself the question: would I rather build a company around a product that all people or organizations use every single day, or around something that is relevant once a year to 0.0001% of the world population? If you have never thought about this, you might just be wasting your time and talent on something much more insignificant than your entrepreneurial gut would like to believe!
Misperception 3: Let’s just get the customers on board and ignore any type of profit margin
This one is particularly applicable to software. As henQ is a software investor and that’s what colors my perspective, my observations are skewed towards this space. Many software entrepreneurs seem to think that profits are, like competitive advantage, something to worry about later. All start-ups are unprofitable in the end, until they IPO or some other far in the future moment occurs. Aren’t they? No, they are not. Successful start-ups that are in the VC funding phase of their life are acquiring profitable customers. Even though they often suffer huge losses, each of the customers they acquire tends to have a higher lifetime value than acquisition cost. As an entrepreneur, ask yourself the question: how much more money do I make per customer than all the activities driven by initial sales, upselling and customer retention? If you sell to SMEs for an annual SaaS fee of €10 and it costs you five times as much to first acquire a customer, your company will never become profitable and you will never become successful. In other words: certain profit margins matter right from the start!
To summarize the above: being an entrepreneur is all about doing and getting things done. Any founder who pivots too often or has too many versions of an investor deck is wasting time. But the other extreme is not aiming all your entrepreneurial energy and talents to an area where these can be applied with a substantial impact on the world and benefit for yourself! Unprofitable businesses eventually just die, so there will be no legacy, and businesses in tiny markets have nothing more than a tiny impact.