From MOOT CORP to Venture Capital: Markets Make Winners
Rob Adams, Founder and General Partner, Tejas Venture Partners
Want to win at MOOT CORP, the premier intercollegiate business plan competition in the world? Or at any of the dozens of new venture contests for student entrepreneurs that have sprouted in its wake? Want to increase your chances of venture financing? Here's the simple secret to securing victory at both of these highly competitive pursuits: forget about your business plan. And, while you're at it, forget about your technology. In today's rough-and-tumble, highly efficient markets, 90 percent of a company's risk is in the market -- not the business plan and not the technology. The simple math translates to spending 90 percent of your efforts validating your market.
Taking a shot at the American dream, either as a competitor at MOOT CORP, which has been hosted by The University of Texas at Austin’s McCombs School of Business since 1984, or as a corporate refugee, has resulted in an unnatural fixation on the business plan. This scenario plays out all the time: Lock yourself in a room and produce the perfect business plan. Run multiple scenarios and document every subtle nuance of response. Call out every risk factor, and make it innocuous with elegant prose. Plot your patent strategy to make the world safe for (your) free enterprise. Three months and multiple trips to Kinko's later, out rolls your tome: perfectly bound, four color graphics, with beautifully footing financial statements. Express mailed to venture capitalists across the country, or sent after much last minute consternation over page counts and font sizes to your professor.
Listen Up, Class!
I'm here to tell you you're wrong.
I've been a MOOT CORP finalist judge for the past five years, a venture capitalist for even longer, and founder of a former venture-backed business modeling company (Business Matters). I've reviewed thousands of business plans, and, frankly for the majority, never read past the executive summary (which, for the record, is seldom the half page it should be). If the plan catches my eye, or is part of the MOOT CORP competition, the next step is the management team presentation. The team presents, and the aspiring entrepreneurs postulate and wax eloquently about their markets. This is where my instincts kick in. After years of doing this, it’s easy to pick up the body language and word nuance of someone who is not solidly confident about his or her markets. My strategy? I ask some deceptively simple, basic questions:
- What is your target market?
- How big is it?
- Who buys your product?
- Why do they need it?
- Who pays for it?
- Who uses it?
- How do the users fix the business problem you’re addressing today?
- How much are they willing to pay?
- Why would they buy from you?
- What business problems are more important to them than this one?
The almost universal reaction to this line of questioning is arm crossing. This is quickly followed by aggressive objection handling (even though these were questions, not objections), followed by the final move, real-time speculation of market needs. Once this speculation takes place, I aggressively listen and propose a straightforward exercise for the team. Let's call the target market you identified and ask them the questions above. If the 100 calls match the responses the team gave me, it's as sure a bet for investment or a MOOT CORP win as anything in the world of business.
The defensive responses I so often get to this straightforward logic are startlingly revealing:
First response: where do we find these people? You sure better have the answer to this one because between the two of us you know far better than I will. If you're going to raise money from someone, or compete with a business plan in a global competition, you should have used your entrepreneurial talent to get a list of your target accounts.
The second response goes something like this: how many people do we have to call to connect with 100 customers? Another great question, and a sure sign you locked yourself in a room, cutting yourself off from the realities of business and the market while putting together that beautiful tome of a business plan you're so proud of. The reality is you better know your sales and marketing model before you present. The best way is to know how many people you have to call to get 100 to respond. This is your first real world indicator of how efficiently your market buys and how much time, money, and effort you'll have to put into sales and marketing.
Third response: we don't have that kind of time to make those calls. You don't? Let's see now, you've taken the time to write a business plan, raise money, or compete in a venture competition, and you want to use someone else's money to develop a product that could take months or years to complete, but you don't have time to call your target market? Instead, you want to raise all the money needed to build your product, then call? I think you see my logic here.
A final suggestion: while you're making these validation calls, get everyone in the company to participate, from the receptionist, to the CEO, to the engineers. Nothing impresses judges or investors more than an engineer who can add color commentary to product requirements based on customer needs from direct interaction.
Show, Don’t Tell
Let me give you a real world example.
Iridium was a 1990s era phone company that developed a satellite-based, worldwide phone service. Think of all the technical problems to overcome. The name of the company was drawn from the periodic table element, Iridium, with 77 electrons circling it, representing the original plan for 77 satellites needed to circle the globe for worldwide coverage (the actual number of satellites was later increased). The tough technical problems were daunting, but solved. The huge and expensive undertaking of building and getting the satellites into orbit was knocked off. Expenses ran into the billions. Smart money was brought in, including Bill Gates and Craig McCaw, the cellular phone pioneer. The service was turned on. And no one bought. No one.
The issue? A very fundamental one some basic market validation would have solved. It turns out, even though the service was built in the time of portable cellular phones, the phones themselves were the size of World War II-era walkie-talkies. The use charges were astronomical, more than four times what cellular charges were. And for the grand finale, the final nail in the coffin was the simple fact that the phones could not send or receive calls indoors. Yes, in the 1990s the "minor" consumer inconvenience of having to walk into a clear sky to send and receive calls was overlooked.
As this Iridium debacle should make clear, Markets Make Winners. Imagine the very simple market validation that could have been done. Ask 100 consumers the questions listed above. The investment would have been one afternoon in a typical mall, one clipboard, a pen, and 100 sheets of paper. A simple set of Yes/No questions like: do you want a headset as big as a brick? Would you pay four times the cellular rate to get global coverage? Do you mind stepping outside to send and receive calls?
Because any self-respecting entrepreneur would have wanted more than 100 data points before telling Bill Gates and Craig McCaw they were pulling the plug on their investment, picture this quick and easy follow up prototype study. Take 10 cellular phone users and offer to pay their cell phone bills for 30 days. In exchange, they have to tape a brick to their cell phone, see their bills (that you're paying) that are marked up by a factor of four, and step outside to send and receive calls. If you were lucky enough to get any takers, they would have been driven nuts in a matter of hours, and the answer would have been clear.
Think of the power of market validation. One afternoon in a busy shopping mall with clipboards and pencils could have saved billions. Ten prototypes run for 30 days would have reinforced the results. You could have either saved yourself a few billion dollars or found a new idea for MOOT CORP.
So, the next time you raise money or compete in MOOT CORP, where are 90 percent of your efforts going?
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