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3 Essential Tips for Student Wannabe Entrepreneurs

2014 January 23
by stefann
dream job

These days many universities have programs to nurture entrepreneurship and offer outlets for students to try out their ideas. For the past three years I’ve been a judge in the Duke Start-Up Challenge where each year over 100 submissions from students compete for a $50,000 prize. But not enough of the Lean Startup culture has permeated these programs and they are unintentionally leading students down the traditional path of the 5-year business plan.

I, myself, competed in the first edition of the Duke contest in 1999, as a sophomore, with MyNetPhotos, a Flickr-like photo storage and sharing service. I made it in the final, but didn’t win because I couldn’t convince the judges that anyone would pay for online services (!). Since then, I founded two companies and learned a thing or two, including the fallibility of judging and that founders should trust more their website stats than the verdict of judges/investors. Back then I had to shut down MyNetPhotos not because it didn’t have users but because I couldn’t afford to buy enough storage space on my student funds. Today we know better: growing traffic can eventually be monetized.

I love the initiative, energy, and creativity that comes through in the business proposals submitted by students and I’d love to see these ideas move forward past the proposal stage. But most of them won’t because they are theoretical exercises and speculation rather than practical products and services for proven needs. Students, I hope this bit of advice can hone your thinking to increase the chance that your product idea is realizable and thus fundable.

 

1) As you expand an idea into a business proposal think first: does it provide value to you, your friends, your classmates, and your school ? The rest of the world will follow if you’re really onto something (think Facebook). If your pitch intro has phrases like “the industry is doing [blah]” or “the world/society is ripe for [blah]” please stop right now and throw it away. Why? Because there’s a high probability that you don’t understand the complexities of existing industries and so your idea is theoretical speculation. And not because you lack smarts, but because existing industries are full of many gory, arcane and sometimes completely senseless details behind the scenes and it simply takes some years to learn them.

For instance, you probably don’t know that the interest rate for mortgages is NOT the strict result of supply and demand like you learn in Econ 101 because it’s subsidized in the form of government guarantees by Fannie Mae. Or you probably don’t know that one of the most difficult parts of making an independent movie is licensing the music which, together with codec licensing, is also the biggest obstacles to making a digital music store and player. Heck, even many accomplished professionals don’t know what actually happens when you swipe a credit card and the intricate details of the electronic payment and settlement systems.

I don’t want to discourage you from thinking big. Please, think BIG but also root your thinking in tangible needs that you can confirm with your immediate social circle who can also validate your product/service prototype. The moment you say “industry” you’re talking about an abstract concept which is difficult to analyze or predict. School courses actually give you a false sense of understanding at the macro level because they only teach theoretical models. In school I learned that financial markets are founded in rational equity analysis. It turns out that’s only half the story. Many more decisions are emotional and speculative. And many markets are far from being transparent and with negligible transaction costs (try trading asset-backed securities).

 

2) The business plan comes LAST! It’s now over 5 years since Steve Blank wrote “The Four Steps to The Epiphany” (the first prescriptive guide to building a startup) and I’m still seeing the majority of funding proposals in the form of business plans. It’s an exercise in futility, there’s no excuse for it, and you’re doing yourself a disfavor. To be fair, entrepreneurship programs are partly to blame because they still ask you to submit something called “business plan”. Being diligent in your research, you search on the Internet and come up with those abominable templates that are taught to MBA students. Unfortunately, no one tells you that a business plan is meant for introducing products with incremental improvements in existing markets by existing companies. And you are none of those things!

Instead of a business plan, submit a prototype (aka Minimum Viable Product) and a 10-slide presentation in which you show that your idea is a problem experienced by some people today and that at least one is willing to give you money for your product based on your prototype. Follow this template and suggestions from How To Pitch a VC.  In order to get to this point you have to reduce your idea to a solution that’s demonstrable without raising investor money. If you need investor money to demonstrate your idea prototype, it’s not reduced to its core enough and you need to keep chopping to get to the essence.

 

3) Use your business to save the world after you actually have a business. First, I’d like to say, bless your heart that you see the good in business and that you think industries are focused on making the world a better place! You have another decade to become cynical :). Meanwhile, don’t throw away the enthusiasm, just remember that whatever business you think is worth pursuing must be self-sustainable: you need to get paid at least as much as you spend.

So when you want to save the world by switching from fossil-burning fuels to renewable energy (submissions that come through every year) you can’t avoid the part that someone has to pay for the solar panels and that today’s PV cells (which is the time horizon for your business proposal) can’t output enough energy for the average household at 45 degree latitude.

As you dream of world peace ask yourself why your idea isn’t already implemented. Why doesn’t everyone already have solar panels? Many times as entrepreneurs we get excited about a new idea, think we found the gem that’s going to make us rich or famous, and forget to be humble. Newsflash: you are not the first to think of almost anything (shocking, I know!). Only when you settle in this humble reality you will allow yourself to truly start understanding the real world and research a viable business model. Go ahead, knock on someone’s door, try to sell them a solar panel installation, and see what you learn. You may get confirmation that you found a true arbitrage opportunity, but most likely you’ll learn the real world is different than your beautifully crafted assumptions.

Here’s the answer to the solar panel dilemma: we can certainly produce them in abundance but most of us don’t want to buy them because at the individual level they are too expensive of an investment for the short-term return. Personal solar energy is primarily a financing problem and secondarily a technology problem. Now, I’m not smart enough to have thought of this on my own. I know this because I looked at who is successful with solar energy (SolarCity) and read their business model. You should do the same. It’s public knowledge how public companies make money.

On a related note, don’t forget businesses serve people and people are well… human! So when you want help people live healthier lives don’t focus just on tools. Another iPhone app won’t make us healthier. The reason we don’t live healthy lives are mostly rooted into our hopes, fears, depressions, and (lack of) education. Seek out Jason Langheier who’s been working hard for over 10 years to create products that help people live healthier.

Please don’t misunderstand: I’m not encouraging you to be a profit monger or dissuading you from pursuing an enterprise with social benefits. If I’d believe money is all that matters I’d be working in investment banking rather than being a founder. But to have any kind of impact, social or otherwise, you have to build something sustainable. Just look at the Burning Man ticket pricing policy, which is just as refined and perfected as the Starbucks’ pricing strategy (usually taught in MBAs) despite their wildly different mission statements.

 

Good luck! Hope this helps.

 

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