This week was VentureFest Bristol & Bath. I was on a panel of investors at a session called the Investor Showcase asking questions of the 12 winners selected from over 45 local start up companies. As well as those 12, there were about 40 other companies exhibiting in a Web Summit style i.e. with tiny stands. I walked around and spoke to a few of them too.
Most of the questions from me and the other panelists were about business model and the unit economics of the product or service.
As I was coming back to London I realised that many of these companies are not really businesses, they are pet projects. That is, they feel like products the founder(s) want to build rather than valuable market problems which they can solve for money.
I sympathise with the entrepreneurs because I made this mistake earlier in my career too.
In my case it was FriendsAbroad, a social community for people who wanted to learn a language. I wished a service like this existed and couldn’t find the perfect competitor out there, so I went ahead and built my pet project. Two years and loads of money later, in spite of trying various ways to get users to pay even just €15 a year, we couldn’t get any material commercial traction. The company was consuming more cash than I could afford, so we sold the assets – i.e. the user base – to a competitor for a lot less than the amount invested.
If you are starting or already running a start up, think hard about what drove you to get started. If you just wanted the service to exist, then you could well be just running a pet project.
To be a business, there eventually needs to be a business model. Somebody somewhere will need to pay something. Yes, there are a few businesses out there such as Instagram and Snapchat which get away without any income just massive user traction, but they are very very rare. Rarer even than unicorns. So just don’t go there.
And to be a fundable business, you need to have a view of what your business model is going to be, how big your target audience is and how much they are likely to pay for your eventual product. If those figures lead to a back of the envelope calculation which has revenues of £10m or less, then you will only raise money from angel investors, if at all. If they could lead to revenues of £50m or more, then you have a chance of raising VC money (as well as angel money of course).
Think you might be running a pet project? Read the Mom Test and get out there and talk to prospective customers the right way. You may have a business, or you may need to pivot.