The following was originally published by Joseph W. Bartlett, Founder and Chairman of VC Experts. If you are looking for more information on venture capital and private equity please visit www.vcexperts.com and check out our Intelligence Database and Reference Material.
A major source of error is a love affair between a founder and the technology he has developed in the lab. The number of new and interesting ideas brought into being every year is astonishing. A field trip to any respectable college or university will reveal a fascinating array of projects in the laboratories, many of which, if brought to fruition, will certainly improve the state of the art. However, a critical error of founders considering whether to commit capital to a project is to assume that the novelty and utility of a new technology are both necessary and sufficient for the success of a start-up. Novelty may be enough to secure a patent, but it is only one part of the venture-capital equation.
No one can make any money unless there is a market for the product, unless people are willing to buy it at a price that returns a profit to the manufacturer.
Assuming the idea is any good, is there a market for it? This simple, banal truth is overlooked time and again by the fledgling entrepreneurs. Is there a market which can be penetrated at a reasonable cost?
The classic example is the pen that writes under water — interesting technically but, as it turned out, no one wanted to buy one because no one wanted to write a letter beneath the waves.
Thus, the single most commonly cited reason for failure of a start-up is the inability to implement a well-thought-out marketing plan. Selling is a matter of airplanes, hotel rooms, and shoe leather; as Willy Loman put it, “on the road with a smile and a shoe shine.” Marketing, on the other hand, has to do with understanding the demand for the product, pricing strategy, evaluating channels of distribution, and maximizing dollars spent on sales. Moreover, the market has to be large enough to support an interesting company. The enterprise with less than $10 million in sales and nowhere to go is usually not a suitable target for venture-capital financiers. Companies of that size are known as the “walking dead” in a venture portfolio – too small to go public and too large to abandon.