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Business for Geeks at OSCON 2005

by Daniel H. Steinberg
08/04/2005

Your team works on a new application late into each night and all weekend long for months on end. You think there might be money in this idea, so you put together a presentation to convince potential investors to back your product. What do you put in your PowerPoint presentation? Marc Hedlund, O'Reilly Media's entrepreneur-in-residence, says that if you are like most engineers, you will have twenty slides about the product and maybe one describing the team. Hedlund explains that this is not the way to raise money. There are many practical decisions you will need to make if you want to start up a business around a product or service. In the three-hour morning session, Hedlund identified the issues that geeks need to consider and explained the consequences of deciding one way or the other.

What You Are Pitching

In his sold-out opening day tutorial at O'Reilly's Open Source Conference (OSCON) 2005, Hedlund gave a crash course in seeing work from the business point of view. An engineer might think that all that is required is to combine a good idea with great people and go about your business building the product. To the surprise of most of the session attendees, the list of questions that a potential investor wants answered doesn't include "Is it a cool product?"

The business people focus instead on customers for the product. They want to determine if there are enough customers willing to pay and whether or not they are high-margin customers. An investor wants to know that customers care about the product. They worry about such things as sales channels and market conditions.

If you want to attract investors, you need to be able to figure out who your competition is. Hedlund said that most pitches present the extremes. Either a team says "we have no competitors" or they present 20 or more companies that are somewhat similar. Hedlund advocated that you find four competitors doing something similar to what you are doing and clearly show how you are different than the others.

Identifying your competitors also helps you make reasonable estimates that potential investors will find believable. You might look at a company you are similar to and guess that within the first year you will have one and a half times the sales that they do. Maybe you are right and maybe you are wrong, but now you have a reasonable foundation on which to build your estimates.

Researching the Market

Suppose you have a great idea for a product. What should you do? Many potential startups think they must enter a stealth mode where they don't tell anyone about their ideas until they have a product almost ready to ship. Hedlund advises that "you should worry far more about misunderstanding the market than you do about secrecy." He advocates picking up the phone and calling as many people as you can think of. For his current venture, he has already interviewed six hundred people and learned a lot about potential customers.

He demonstrated the technique with an audience member. In this example, Hedlund explored the market for a potential conference he might put together. In a quick and casual conversation, he found out a bit about the conference attendence habits of the person he was interviewing. Hedlund determined how many conferences his subject had attended this past year and how much he had paid. Hedlund then described the conference he was thinking about and asked whether or not the interviewee might attend and what he might be willing to pay. He took a minute at the end to find out what were potential obstacles to attending and what might be a factor that would encourage registering for the conference.

Hedlund's point was that although you might be worried about revealing your idea, you should pick up the phone and ask everyone what they think. It's as simple as saying, "I'm working on an idea and want to see if it would work for you." He finds that many people are willing to spend half an hour talking to you about your idea. Explore feature requests for similar products or ask people what their pain points are. Assume that everyone is fascinated with your idea. If someone tells you they aren't really interested in your idea, follow with a question that explores what it might take to get them interested.

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