Knowing Your Customer

Last week we attended an event where aspiring entrepreneurs pitched their business ideas to a group of mentors.  The aspiring entrepreneurs would then take the information from the one on one conversations they had with the mentors, refine their plans, and then pitch the final business plan the following week.

Two major observations.

Firstly, almost all of the ideas were focused on social media, consumer internet.  This was disturbing.  We heard a lot of ideas that would be considered a feature on an existing product.  In fact, many of the ideas already exist as a product, or a feature. It’s just the entrepreneur didn’t know about it.

Secondly, very few (and I mean one or two out of more than twenty) knew anything about their prospective customer.  It is typical for a would-be entrepreneur to come up with an idea for a business out of their own personal experience.  They typically have an “aha” moment that is characterized by the “there has got to be a better way” insight.

That’s fine, but it’s only half of the equation.  The other half requires the entrepreneur to work through the following: who else has the problem, what does that customer look like, and what would their product need to look like in order to be sold to someone else.

We also heard almost everyone in the room say that they needed some help with market validation.  Market validation occurs when a product is introduced to the market and people buy the product, meaning that they become customers.  A typical angel investor won’t even consider investing in a company unless the company can prove market validation – meaning the company needs to show revenue and customer traction.

As a young analyst on Wall St., we would view a company’s product through our own filters.  We learned that this was a major mistake.   One of our favorite mistakes was when we found a company that had a significant amount of domain knowledge on DSP semiconductors and had a lot of success in selling products based on those DSP chips to the communications industry and the military.  In the course of expanding their business to the consumer market, they developed a PC board with a DSP chip for the fax market.  The PC board would make the fax process faster and more reliable as it would eliminate the processing overhead of faxing software on the CPU – which meant that the occurrence of Microsoft’s blue screen of death would be less.

There was a “small” hurdle.  The user would need to set four “dip switches” in order to install the card in their PC.  We figured it out quickly, and the card worked flawlessly.  We loved the card and the market opportunity.

Other prospective customers?  Not so much.  The card didn’t generate the revenues that were expected.   No one purchased the product because it was too difficult to use for the average person.

We learned the lesson the hard way.  Just because you think it’s a good idea, doesn’t necessarily mean that everyone else will think it’s a good idea as well.  You need to understand your customer, their problem, and what the product needs to look like before they hand over their money.

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By Richard Piotrowski CFA is a former #1 ranked securities analyst, and the Managing Partner of Outram Research LLC, which focuses on assisting startups and prospective turnaround companies define an executable product strategy, competitive strategy, and an exit strategy.  You can follow Richard on Twitter: @Angelpitchdoc.  He can be reached at richard@outramresearch.com, or at his blog: angelpitchdoc.wordpress.com.  Also check out our website: www.outramresearch.com

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About Richard Piotrowski, CFA

Richard Piotrowski, CFA, is a formerly a #1 ranked securities analyst, who has 20 years of experience building, dissecting, and fine tuning presentations, business models and valuation models of all kinds. The experience has been gained working in the investment community on both sides of "Wall Street", on "Bay Street" (Canada), as well as on "Main St." as Chief Financial Officer, Chief Operating Officer, as well as Evangelist and Marketing Director, where he focused on building messaging for solution sales opportunities based on value positioning, high ROI and fast payback. Richard joined Canada’s investment banking community in the early 1990s as an analyst following technology companies. He was recognized within two years by the Street, and was ranked "First" for Quality of Research in the survey of institutional investors conducted by an independent advisory firm – Brendon Woods. Richard was also the founding member of the internet technology research practice at two boutique investment banks.
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