How I Lived Out My Shark Tank Dream as a Venture Capitalist: 5 Traps to Avoid for First-Time Entrepreneurs

Back in January, I had the opportunity to serve as a judge, role-playing a venture capitalist, for DECA students pitching competitive start-up business plan proposals. Feedback I found myself repeating to each entrepreneurial group made me consider the following 5 Traps to Avoid for First-Time Entrepreneurs:

1. Don't underestimate costs. Many groups stated that as founders, they would be willing to take no salary until their company was profitable a few years later (which in itself is an ideal timeline). Ironically, this is the generation that is disrupting the current workforce and labor market by driving aggressive salary negotiations upfront straight out of university. A majority of the proposals I viewed said they would pay their first C-suite employees an average of $60,000 and their remaining core developers and team between $50,000 and $80,000. According to Inc's 2018 "5000 CEO" survey, 45 percent of responding CEOs paid themselves less than $50,000, 28 percent started to pay themselves immediately, 31 percent waited 12 months, and 18 percent waited two years (Inc.). So what was the students' thought process on being able to afford company salaries? Over reliance on network favors. A majority of teams referenced starting out with pre-made connections such as funding from parents or having a friend in mind who could code for cheap or in exchange for an equity stake. This may approach may work in the beginning (if you're lucky), but it is by no means sustainable long-term and is often times the exception to the rule. Not many friendships can bear the stress to lift a company off the ground (friendships have been lost over less, like games of Monopoly or Catan). While money cannot buy happiness, it certainly can buy talent, convenience, and everything else needed for operations. Do not underestimate costs, specifically for talent and overhead. Small companies will have the most difficult time. Forecast and budget for more capital than you think you will need, and then forecast again and ask investors for more because you likely will need it at the beginning.
2. Don't assume development of an app is the sole solution. An app is not a competitive advantage. All it takes is someone else with enough capital to replicate it. Most applications function in conjunction with a bigger-picture product or service, while the application tends to simply be the medium or platform for user interfacing. Take Uber for example, you may argue that their application platform is their product but the real service they are selling is connecting riders with drivers. Their solution is not the now iconic, easy-to-use mobile interface but rather the new pathway for consumer convenience and connection to transportation that was never done previously. If you think "why hasn't someone created my application already?", google it, and see if others had and it failed for some unsustainable reason. Uber's app is easy to replicate (just look at Lyft and Singapore's Grab), but not their back-end network and trusted reputation. Be humble enough to realize you may not have been the first to think of your idea. The difference between companies like Uber and Airbnb that are disruptive in the market is not just enhancing or improving on a problem everyone knew about through creation of an application, they solved an issue people did not even know was a problem and continued to adapt to solve the new problems that came after.
3. Don't mute your personality. While there is fine line between enthused and overbearing, confidence and arrogance, excited and naive, it often pays off to take the chance on creating a lasting, memorable first impression. Beware of unprofessional-ism, but most often than naught, authenticity shines genuinely and it can be contagious to your audience. Presentation and delivery is arguably more than half the battle as the pitch will inevitably have drier moments of rattling off figures and presenting a more thorough, detailed written proposal. Practice both verbal and written as they require two different skill sets. Make sure to proofread; there is nothing more off-putting than a glaring typo. Have an expert in your industry and a layman listen to your presentation for constructive feedback. Both sides of the spectrum should feel they took something away that is personally impactful or relevant, and understood the high-level concept. It's tough to create a memorable name or image that comes to mind when someone thinks of an idea, so think about also investing in a logo and perhaps a professional designer to create it for you. You only have one chance to make a first impression and while you can change your image later, it ultimately takes away from initial marketing if you have to re-brand.
4. Don't assume your consumer market is a sample of your home population. For example, Silicon Valley is a poor sample representation of the global market, let alone the U.S. market. Ideas that originate from your experiences that appeal to only your problems will only be valuable to you (see false consensus effect and #firstworldproblems). Know your consumer base and understand that not all passion hobbies can be converted or translated in to a viable business. Ask yourself whether consumers would find your service or product desirable and if so, who? There are many overplayed ideas that are just a slight variation of another existing idea (e.g. everyone is passionate about solving the problems of fitness attainability, loneliness, and technology dependence), but not everyone can produce proof of concept past that point. To run a business takes more than good intention. Not only must innovation provide a solution to a common issue creatively, it must be resilient enough for consumers to continually find it useful enough to re-purchase in the future (side tangential read on planned obsolescence). When listing a presumption that is critical to the importance of why your product or service is relevant to today's societal problems, your data needs to be grounded in fact, not a poll or perception of your own environment. Citing sources is not just for academic papers. Use market research and hard data versus simply stating the obvious, "Hey, isn't this one thing kind of annoying and we should fix it?"
5. Don't discount environmental change e.g. competition. The good presentations showed a non-linear, exponential curve of growth; the great presentations showed an initial expense before breaking even and then achieving profit (see below overly simplistic graph). None of the presentations demonstrated a plateau or potential leveling off of growth in projected years due to emerging competitors.

Every company has a life-cycle and throughout each of those life stages, the challenges are different. Growth looks different for a company at the time it first releases compared to what it looks like after it hits maturity and the rest of the world has become accustomed to it. The product will inevitably have copy cats when the solution is no longer novel and the accessibility to replicate the idea will be more prevalent, especially by those who will have more capital and resources than you do. While it makes sense to portray the most positive light to potential investors, the better route is recognizing the reality and showing investors -- who are always thinking long-term -- why the company has a true competitive advantage to combat the inevitable.

The first people (and dollars) to discover something exploitable and profitable are treated better than the subsequent dollars that come rushing in. The imitators then ruin the endeavor for everyone, bringing with them throngs of human bodies and enough capital to crowd out whatever profit margins once exited. Valuations are pushed up, secrets are shared, shoddiness and sloppiness appear everywhere as the worst, most amateurish entrants are attracted, gold rush-like, onto the field. Scam artists aren't far behind, followed by new regulations to rein everyone in once enough money has been lost, stolen or set on fire. (Brown's opinion on the "Crowds" attempting to scale Mount Everest).

A good offense is a good defense and it's not sufficient to say that a company's only edge is being first-to-market. Compare the failure of Yahoo (that once was the earlier go-to index-search) to remain as relevant or updated as Google and was therefore easily replaced, to Tesla's successful EV models remaining a leader in the field (despite other major manufacturers now following suit with EV model releases) due to not easily replicated R&D. Consider how many podcasts and music festivals there now are and what it would take to stand out today.

No matter how good you are, if what you’re doing is very profitable, others will copy you and will be “good enough” to impinge on your game. Which is why the best investments are those with moats – companies that are so good at something that their abilities and assets literally act as a barrier to those who would follow and imitate. (Brown, "Crowds).

And if having a sustainable competitive advantage seems too daunting or unrealistic but you know you're on to a good thing (at least in the short-term), that's a strategy too. Consider an exit plan like becoming acquired or bought. Although there is a sense of romance for an entrepreneur to sell their idea straight to the consumer, B2B is sometimes the better fit. Be open to new perspectives and listen to diverse opinions. Be ready to pivot.

So What Makes a Good Business Proposal? Check out these start-ups' pitch decks (e.g. Airbnb, Foursqaure, Uber) that helped raise millions. Each one included aspects of the following critical components:

• Executive Summary - keep it to a one page summary of the business model
• Problems - list top three key issues as to why this is important and there is a need for what your product / service is addressing
• Customer Segments - understand your target customer and market
• Unique Value Proposition - single, clear, compelling message that states why the product / service is different and worth buying
• Solutions - top three features of the product / service, not just an indirect benefit
• Channels - pathways to customers
• Revenue Streams - revenue model and life time values; explanation of revenue and gross margin
• Cost Structure - explanation of customer acquisition costs, distribution costs, human resources costs and other operating cost considerations
• Key Metrics - explanation of the key activities that must be measured to gauge success
• Competitive Advantage - why the product / service cannot be easily copied or bought; who the competition is
• Conclusion - specific request for financing; summary of key points supporting financial request

Amazing job to everyone who presented. I was thoroughly impressed by the level of enthusiasm, professionalism, and innovation. To all those who created demos and working prototypes, a special applaud of admiration toward your initiative. If you are seeking a mentor or future investor, happy to connect.

Finally, thank you to all of the volunteers and administration in the coordination of such a meaningful event. And thank you to Menlo College for sharing the event; I am proud to have been part of a team that invests in the community and youth.