The proverbial “chasm” in technology startups was first crossed in the 1991 book by Geoffrey A. Moore. Of late I have seen a number of proposed ventures where their very first step is a leap into an abyss. Concepts by intelligent and capable teams that are unaccompanied by any R&D funding at the sperm-meets-egg stage are quite difficult to launch. You can interview prospective customers all day long based on PPT slides and an impassioned pitch, but, if nothing functional can be demonstrated, all you are accomplishing is collecting opinions. Until you build it, price it, and get real orders, you have no convincing data. You will be tagged by most professional investors and seasoned angels as “too early” because you can’t show any traction when you have nothing tangible to deliver.
How do you get someone to provide financing at the nascent R&D stage, if your idea is too big to be leanly bootstrapped? If you are student at an entrepreneurially-minded university, you may have access to startup programs that come with a stipend to enable you to make some headway. You may even be able to align with faculty members to land some nondilutive grants. If you are already out in the world, you can attempt to enter an accelerator program that provides a bit of cash along with all the usual assistance and connections. And, there are a few venture funds and angel groups that will invest very early in an IP-laden and protectable opportunity derived from proven researchers at a top university. If options like those don’t fit, you will have to fall back on people who know and trust you and are willing to risk some dollars in a situation where none of the steps have been de-risked. The more relevant your track record and experience to date, the more likely you are to convince someone to take that gamble with you.
Obviously the bigger the idea, the more this is a problem. And, the more uncharted your market, the harder it is to prove that you have a business in the making. It usually helps to have competitors sharing the load of creating brand new market classifications. You together educate the potential customers, create a “must have” demand, and keep one another honest on pricing. Most startups envision better solutions to recognized problems, but that doesn’t automatically mean that customers will pay significantly more to adopt them or will want to endure any switching headaches. Your better mousetrap may be a technical tour de force but languish in the market because decision making and budget controlling procurement officers don’t buy technology just for the thrill of it.
Let me interject here that Steve Jobs brought the movie term “suspension of disbelief” into the technology world with Apple products, particularly iPhones. You’ve bought as many as I have with no regard to their ever more stratospheric pricing. But, gadget lust is a consumer market behavior and not one that applies to most B2B concepts. (You should see my new iPhone XS Max.) Pricing for business adoption is a delicate balance that requires a thorough understanding of purchasing nuances in the intended audience. Pricing is of course a direct function of your earliest R&D work in terms of what it will cost you to build a product or deliver a technology-based service, but all the staffing and structure that goes along with creating a functional business will be the difference between glory and failure.
Can you get prospective customers to underwrite your R&D? Customer funding is a tried-and-true technique to provide needed capital. But, if you are genuinely at the R&D stage, it’s hard to ask prominent business customers to prepay for something significant that isn’t yet invented, might in fact not be achievable, and has lots of cost unknowns. Once again consumer behavior may give you an opening via crowdfunding if you have a more circumscribed idea that looks deliverable for a known and low price point. Plenty of people have gambling instincts to throw money at what appear to be cool new tech items, and their lives are not going to be permanently changed if you can’t fulfill your promise. If you are sticking with that really big idea, you may even have a shot at doing an ICO or a regulation friendly platform-based securities sale to top up the equity section of your balance sheet. I’ve seen those work, but, if you go that route, you had better to be able to explain clearly how a viable business awaits after those funds are deployed.
I have seen many companies raise several $Million by sheer perseverance using some combination of the above methods to pay for their R&D, assemble a first-class team, and commence marketing, yet still have miniscule revenue to show. Some of them are SaaS models where short-term revenues understate the real value being created; others have just misjudged their intended customers and their buying patterns. The latter are in a real pickle. If management used “all that money” and seems not to have reached a safe landing on the other side of the gorge, what’s to imply that more dollars invested will have any better outcome? What happens to early members of the cap table if they on their own can’t step up to meet the forward financing needs? Is the problem the idea, the product execution, the market, the leadership, the pricing, the timing, or something else? How can the people that created this situation suddenly get smarter and fix it? Has something external, like a new competitor or a surprise technology shift, overshadowed what looked like a great opportunity a couple of years ago? Is there some underlying IP that will save the day? Those are all tough questions. Being caught in that trap is a harder problem to solve than starting out fresh and penniless.
It seems like I spend the majority of my time trying to match entrepreneurial dreams with investors who will enable those dreams to be realized. It’s the lot of the sturdy entrepreneur always to be mindful of leaping the abysses, chasms, and all the other deep nightmares that are routine parts of “starting the start.” They’re all tolerable if you deal with them from the perspective of what your going business will be like, not what your product or service will be.