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Two Non-Business Model-Related Questions I Ask When Evaluating a Company (Part 2)

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Two non-business model-related questions I like to ask when evaluating a company's potential are "Why are you the ideal team to solve this problem?" and "What unique belief do you have that explains why no one else has started this company? "I believe these two questions can give great insight into the potential upside of the venture and the probability of success. In this second part of this two-part piece, I'll discuss the question, "Why are you the ideal team to solve this problem?"

The answer to this question should be something that gives the team a sustainable competitive advantage over existing or potential competition and increases the likelihood of reaching full potential value.

Experience Starting Companies

Starting a company is a unique and challenging task. It requires a special skill set and mentality. I would rather back someone who's done it before, preferably successfully, but even having failed, than someone who hasn't.

Distribution

It seems distribution is one of the more commonly overlooked, yet more important things for a startup to consider. How will your customers get your product? "If you build it, they will come," is usually not true.

Facebook has a massive user-base, making them the most qualified to distribute many products (such as Instagram). The team most qualified to start a gym chain where you don't have to put your weights away is an existing gym chain because they already have distribution.

If distribution requires a lot of capital, such as hiring a sales team, that can be less than ideal. If you're selling into a tough market, such as government where the sales lead time will be enormous, or small business, where their budgets are low, that can also be a big problem.

Virality

"It's gonna go viral!" is not a good distribution strategy. Sure, some startups do, but most don't. Virality can definitely be a valuable and successful distribution strategy, but there needs to be a method to it. "People are going to tell all their friends!" is not a good explanation. Adam Nash posed three questions to consider from a product development perspective to help with virality on his blog:

• "How can a user create content that reaches another user?
• How does a user's experience get better the more people they are connected to on it?
• How does a user benefit from reaching out to a non-user?"

Certain products, such as Dropbox, will have more viral potential than others.

Domain expertise

Having a thorough understanding of the market and the customers' problems is very important. For example, I wouldn't want an SEO consultant to be my investment banker and vice versa. I would trust a publishing executive to understand the problems of publishing companies more so than someone who's never worked in publishing.

Personality

In his popular TED talk (http://blog.ted.com/2008/09/19/10_things_you_n/), David Rose describes the traits he looks for in a team. I largely agree. Some people just give me the impression that they're super smart, bad*ss-leaders, who are capable of building a great company. For example, I'd fund anything Tyler Durden ever founded lol. Some people are just hustlers.

Proprietary Technology

Proprietary technology, preferably patented, can be a competitive advantage, but certainly doesn't mean the company can reach its full potential value. Examples of proprietary technology that provide a competitive advantage include SpaceX and biotech companies.

Network

Having the right connections is also pretty important, especially for a b2b company -- though probably less important than the rest, because they can be acquired, especially if you're doing something awesome. If you can't even get on the phone with potential customers to do customer development calls, it's probably a sign that there's either not a big enough market or you need to bring someone on who has the right connections and can get meetings. The problem is only going to continue when you start doing sales or business development. Having connections is also very important if/when it becomes time to raise money.

Conclusion

Simply having the idea is not a competitive advantage. Ideas or worthless -- just ask Sarah Ware. If you need to have a potential customer sign a non-disclosure agreement, it probably means you don't have a company - or at least that you're not the ideal team to run that company. If there's a larger company that's already providing a similar service -- for example, an e-mail client with a certain feature -- they should know whether or not it's something their customers want and if they did, they would add that feature.

It's all about execution. And having at least one, preferably more, of the above traits will increase your chances of executing effectively. If a team doesn't have at least one of these traits, I would look for traction. Put the proverbial proof in the pudding