Column: It’s not where you start, but where you can go

Facemash and Odeo were startups that made it big, but not as they were originally envisioned. The truth of early stage investing is that nobody knows how the business will develop. Just as Facemash morphed into Facebook and Odeo into Twitter, the end result often has nothing to do with the initial concept.

Entrepreneurs present a concept and convince investors that there is an attractive market, a plausible exit strategy and an opportunity for outsized returns. But they are predicting the future. In reality, at the angel stage of investment, the validation in the market, the valuation and the likelihood of success are all guesses.

A good team can recognize new ideas and opportunities as the product develops, the market adjusts and customers react. Founders start with a minimum viable product then pivot the business model with market feedback. Only a good team will know when and how to pivot so as to increase the probability of success.

In the case of Odeo, the founders had developed technology to share podcasts. This was a promising market in 2005, but in June of that year Apple included podcasting in iTunes and suddenly the competitive landscape changed.

However, in the process of development Odeo introduced a group SMS service called Twttr, allowing people to send messages to groups of people in a public way. This add-on service caught fire while the Odeo service languished. So the founders pivoted, developing their Twttr application into Twitter.

Early stage investors understand this process and look for the team that can deliver on not just today”™s idea of the business, but can pivot as well.

This means that entrepreneurs should tout market feedback from early customers and convincingly show that the product is meeting the needs of the market. That someone in the market likes the product is important. But to investors, touting market feedback also demonstrates that the entrepreneurs are listening, which can be even more important than the initial feedback itself. As the product develops and the customer base grows, a good entrepreneurial team needs to understand why and how customers are using the product.

The feedback on Facemash was both terrible and enlightening. The initial response led Mark Zuckerberg to realize the website was not appropriate; he even calling himself a “jerk” for creating it. But popularity, the users and the feedback suggested the need for a centralized website for students and this market demand led to Facebook. It later became a site for everybody.

In both Facemash and Odeo, the founders did not fall in love with their products. They recognized the shifting trends and focused on creating a viable business. They followed the money.

This is what investors want to see. They want a team that can take the spark of an idea and create a business out of it. They want to see focus on developing the business and the flexibility to adapt to the market.

In terms of the pitch, entrepreneurs should tell a story that goes well beyond the product and into the how. They need to introduce the team and explain why the team has the capabilities to deliver.

Showing business capabilities includes strong credentials and quality content. But just as important is the presentation itself. A neat, organized appearance helps. Slides and presentation materials should be clear and well-thought through. The presenters should show openness, listening to questions and answering thoughtfully, without defensiveness.

There is actually a tricky balance here: flexibility balanced with focus, which is not easy to get right. Entrepreneurs should be confident in their product and their market but also demonstrate a willingness to throw it out the window; dedication, focus and flexibility when needed.

What this means in practice is that the entrepreneurial team needs to present:

• A strong team with solid management credentials and an understanding of business not just the product and the specific product market.
• An openness to suggestion and willingness to take feedback.
• A willingness to step aside as management if necessary.
• A focus on building a business not just a product.

This last point is probably the most critical. As I have written before, entrepreneurs often think that they are presenting the next greatest product concept to investors, but they are not. Entrepreneurs are presenting an investment opportunity in the form of a product, a market, and a team.

If the product and market turn out to be failures, which they most likely will be, the team will make the investment work. In fact, all that investors can be sure of is that the business will change so the investment decision comes down to how the well the team will manage this change.

Jeff Loehr is a principal consultant at Stratist Consulting in White Plains, a firm that helps businesses of all sizes design strategies, business models and execution plans, and a founding partner of the Westchester Angels, an investment group that brings early-stage investors and startups together. He can be reached at jeff.wbg@stratistconsulting.com.