Customer Interest != Big Opportunity
We had a couple interesting entrepreneurs present today, but they both fell into a trap that snares many entrepreneurs pitching institutional VCs. They both built their businesses from the ground up, based upon market/customer requests -- that part is super! However, they both equated early customer interest with big opportunity -- that's...well...less than super.
Demonstrating customer interest jumps an entrepreneur ahead of all the idea-on-a-napkin entrepreneurs who just assume customers will flock to their big idea. However, when institutional investors ask questions about the size of the opportunity, including market size and scalability, referring to current customer interest really doesn't address the question.
This issue is particularly acute with entrepreneurs who have been successful raising angel money because some angels equate the two, or worse, just get excited about the early customer interest (forgetting about how big the business can be). Those entrepreneurs often repeat the mantra of "customers love our product" when the VC's real questions are how many of those customers exist, how many competitors will enter your market when they see how lucrative it is and how will you scale early customer interest into a business that sustains itself -- HOW BIG CAN THIS BE!
Understanding the difference between these two concepts, and demonstrating it during VC Q&A can really aid a presentation...
Demonstrating customer interest jumps an entrepreneur ahead of all the idea-on-a-napkin entrepreneurs who just assume customers will flock to their big idea. However, when institutional investors ask questions about the size of the opportunity, including market size and scalability, referring to current customer interest really doesn't address the question.
This issue is particularly acute with entrepreneurs who have been successful raising angel money because some angels equate the two, or worse, just get excited about the early customer interest (forgetting about how big the business can be). Those entrepreneurs often repeat the mantra of "customers love our product" when the VC's real questions are how many of those customers exist, how many competitors will enter your market when they see how lucrative it is and how will you scale early customer interest into a business that sustains itself -- HOW BIG CAN THIS BE!
Understanding the difference between these two concepts, and demonstrating it during VC Q&A can really aid a presentation...
Labels: customer interest, market size, presentations, vc-faq, venture capital
Posted by VC Dan | 8/15/2007
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Comments (3)
Great post Dan.
VC seems to me to be an amplifier more than anything. If your going to amplify your product by taking venture, there has to be an audience for you to project the message to.
You bring up a solid point in that one customer doesn't equal a crowd.
great analogy Alex -- keep 'em coming!
Happy Saturday Big Guy! Funny you posted on this. I was just reading up on Vinod Khosla and some of the philosophies that drive his investment strategy. He highlights a different but similar issue.
Companies already at the head of a market spend so much time catering to customer's needs that they overlook the market need. He points out that customers rarely really know what the market needs are, and this company/customer interaction allows innovators to enter a market with new products or services that provide a previously unforeseen value. This is often the cycle that allows a new market entrant to overtake the existing leader. I hope you weren't referring to us in this blog! ;) Have a good one!
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