Entrepreneurs Should Learn to Think Like an Investor

I had a walking meeting scheduled for this morning’s Geeks on a Trail hike.   Before heading out I stopped in for a quick coffee at the long running Seattle Startup Open Coffee which Andy Sack founded years ago and which John Sechrest now shepherds forward.  Spying a new face and an empty chair, I sat down and introduced myself.   To protect the innocent, let’s just say his name was Ricky.

Ended up having an invigorating conversation about Ricky’s startup project.  It was clear that Ricky was an extremely talented developer and really passionate about his product.  As is my wont, after about 10 minutes of getting to know him and his product… I was ready to talk business.

Ricky had lots to say about product features and how he could build them.  But Ricky had virtually no clue about whether the startup project he was working on (for a year!) was likely to also be a sustainable business.

We talked about a lot of stuff that Ricky wasn’t thinking about — like whether his product could ever actually make enough money to warrant investing another year of his life.  What became clear was that after working on his product for about year he still had no idea whether his product had any hope at all of becoming a sustainable business.

A few of the questions he had no answer for were:

1) how big is the market for the product you’re building?

2) how are you going to acquire lots of customers?

3) how much do you think it will it cost you to acquire a customer?

4) how much will customers pay to use your app?

Before I go on, let me just say that Ricky struck me as a really smart guy and seemed like a really nice guy too.  So when I bag on Ricky now it’s not personal.  In fact, I have roughly the same conversation with other entrepreneurs so frequently that it prompted me to write about it here.

Ricky correctly pointed out that I was asking the kinds of questions that an investor would ask.  But, he claimed, since he hadn’t figured out yet what is final product and customer were going to be and because he wasn’t raising capital he therefor didn’t need to bother with such non-proudcty questions like these.

There is a lot wrong with Ricky’s claim, but here are two of the thoughts I left him with.

1) YOU are an investor in your startup.  So is your wife and your kids if you have them.  The opportunity cost alone is sobering when you consider that two years working on a project will cost a talented developer like Ricky at least $250k in salary.  Add in the sleepless nights and the “always on” lifestyle of an entrepreneur and you’re talking some serious emotional bank.

2) Asking those investor-ish questions is key to figuring out what product you should build for what customer.  You may never bring in investment capital; but remember that the questions investors care about are all filters on whether your startup is likely to succeed.  If you don’t have a compelling story to tell about how the product your building is going to be valuable enough to a scalable customer base that will pay enough for you to build a sustainable business around… then you just may not have found a great product or customer yet.  That doesn’t mean you’re dead in the water.  It just means you haven’t found a startup “business” yet.

Ricky was clearly enjoying the startup lifestyle and loved all that he was learning.  I support that and I wish him the best of luck.  But startups don’t have to be just about luck.