How a new company or a new startup needs to think about the world

I had a chance to do some initial consulting with the two founders of a new company this weekend. It was a great meeting, because there was a lot to discuss, and a lot of misconceptions. What we plowed through at lunch may be helpful to you if you are thinking about starting something of your own…

These two people (let’s call them Ann and Bob) are currently working at a government agency, and they want to go start a consulting company of their own. It does not really matter what their particular area of consulting is. What we are going to discuss applies to any marketplace.

At the start of the conversation, they were all over the map. The two of them feel like there is an opportunity to start a consulting company in their arena because there is lots of news coverage right now about their arena:

  • The National government is talking about it at the federal level
  • Foreign governments are talking about it
  • State governments are talking about it
  • Local governments are taking actions in alignment with state and national governments, as funding becomes available
  • Insurance companies are talking about it
  • Grants are possible
  • Education is possible
  • Consulting on new laws and regulations is possible
  • Consulting with local constituent groups is possible

When I asked Ann and Bob about possible clients, the list included insurance companies, municipalities, non-profits, foreign governments, government agencies, the military, Haiti, Cuba, Africa…

When I asked them about their value proposition, they mentioned that they are “experts”, and they plan to offer “consulting services”, and that no other company is focusing on this arena (that seems highly unlikely, but that’s what Ann and Bob believe). They said that they can write and manage grants, help with education, provide vulnerability assessments, help with mitigation, etc.

Then they asked if investors would be interested. And this is where I come in.

An investor is looking for something worth investing in, and something that has the probability of a high return on investment (like 50X or 100X potential ROI for a seed stage investor). For that to happen, the company needs to be able to scale – to be able to grow and reach a very large market. From an investor’s standpoint, this company that Ann and Bob are contemplating currently has four big problems:

  1. Ann and Bob did not have any real value proposition coming into the meeting. They have a nebulous notion of things they might be able to do as a company, but nothing we would call a crisp value proposition.
  2. There is nothing tangible. By that I mean there is no defined product, no existing customers (nor any specific customer research), no demonstrable traction in any marketplace, no defined marketplace for that matter, and so on.
  3. Their ideas are all over the map. They have a hundred ideas, a hundred possibilities, but no focused opportunity in their sights where they know they could make money.
  4. They have a hundred potential clients/marketplaces, but they have never sold anything to any of them. There are a lot of possibilities, but nothing real.

So we talked about these problems they face. I gave them some examples, to help them understand what investors look for. We talked about, a company that I visited last week. Even’s problem space is “income volatility”, where low-wage workers get into untenable situations where they run out of money (for example to pay rent), and the next paycheck will not arrive for a week. This forces workers into terrible situations with places like pawn shops and payday lenders – businesses that exist to extract as much money as possible from their customers with gigantic interest rates.

Even’s solution is an app that employees can use (for example employees of Walmart). The app allows employees to take an advance from their next paycheck via the employer. This is a benefit to the employer because it reduces stress on the employees and increases retention. Even sells the app to the employer and charges monthly fees that are quite reasonable. Now Even has a good solution to a big problem, and Evan is able to sign Walmart. NOW investors are interested. There is a real, defined product with a real revenue stream and a real client paying for it. There is demonstrable traction in the marketplace because Even has Walmart as a client. Now Even can scale up to handle many more employers and employees, and investors are happy to invest in something like this.

We talked about Terravion, where they have a “clogged emitter” product (see this page for a discussion). Terravion can tell a farmer about clogged emitters using aerial photos, and save farmers tens of thousands of dollars in crop damage. For a farmer this is an absolutely no-brainer value proposition, because the farmer pays $1,600 per year for the Terravion service, to save tens of thousands of dollars. The ROI is incredible for the farmer.

This is the kind of place that Ann and Bob need to get to in their thinking about their consulting company. They need a solid, no-brainer value proposition that they can offer to their potential clients, so we talked about possibilities.

Think about possible clients, and about defined packages that you could sell to them. Keep in mind: The kind of product you sell to a local governments in a place like Okracoke, NC or Kitty Hawk, NC is completely different compared to the product you would sell to New York City, which is completely different compared to the product you would sell to insurance companies, which is completely different compared to Haiti… Two points I made:

  • Abandon Haiti, and all foreign countries for now. Haiti has no money, and a corrupt government, and is far away, etc. Compared to the thousands of municipalities in the U.S. (which are nearby, well-funded by taxes, and not corrupt), Haiti is a distraction.
  • Now, PICK ONE THING, pick one marketplace and one product, that you can easily sell in a reproducible way. You are just two people. You cannot do a hundred things, or even two things. Pick one thing and do it well. (this is often referred to as the “beachhead market” for the company).

As we talked, they honed in on this one particular niche. In their case, this potential product looks a lot like the electric wheelchair company that advertised on TV, where the wheelchair company  helped senior citizens get free electric wheelchairs from Medicare. The wheelchairs are a perfect product, because the end user gets one for free. There is no friction with the end customer because someone else (Medicare in this case) is paying. They thought of an opportunity like that. But there are potentially many other things they could package and sell:

  • Education packages
  • Grant-writing packages
  • Specific consulting packages around particular regulatory environments
  • And so on…

In any of these areas, they can charge a municipality a fee, and either the client gets a set outcome (a group of employees educated, for example) or they can guarantee ROI for their clients (in the case of grant writing, for example). So I encouraged them to think more about how to package their services. Then I encouraged them to think hard about, for any given package,  how to price the package, how to reach potential customers, how to make the sale, what the deal looks like to the client, etc. Then think of other potential products they could sell to the same audience. NOW they  can create one or more strong value propositions for their customers. Then they can start selling and delivering, and start making real money. Then, with a product and a marketplace and demonstrated traction, they have something to talk to investors about. Or not – investors can be a pain in the ass, and they may not need them.

You can do this same kind of exercise in your own company. What is your problem area (e.g. Even’s is “income volatility”) or audience (Terravion’s is farmers). Now:

  1. What product(s) can you create and/or offer that can help this arena or audience?
  2. How are you going to price your product?
  3. How are you going to find and reach the audience so you can offer them your product?
  4. What will the client receive when they buy?
  5. How are you going to deliver the product?
  6. How much profit will you make after you handle ALL of your expenses?

Lots of articles here on MTMM can help with this process. In particular check out the Ideation section of the Table of Contents.

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