SBA’s Blog of the week….
Let’s Pop the Bubble on Startups, Ideas, and Investments
Maybe it’s because business schools teach it that way. Maybe it’s because it’s easier to write about. Maybe it’s because of the dream and the glamor involved. Whatever the reason, there is widespread misunderstanding about the reality of business ideas, startups, and investors.
This misunderstanding results in a stream of questions on social media, blogs, and entrepreneurship sites. They come with different wording around these core concepts:
I have a great new business idea, but no money. Where do I find investors?
I want to start a business but I have no money and no contacts. Where do I get investors?
I have a great idea for an existing company. I don’t have the resources. How do I sell it to them?
I have a great business idea but I don’t have experience or resources to execute. How do I sell my idea?
Let’s look at reality in this area. Consider this a reality check.
1. Very few startups get outside investors.
Only two or three of every 100 real startups get outside investment from angel investors, and about one per 1,000 get venture capital in the beginning. That’s a hard number to track down because statistics vary and they depend on definitions. The SBA reports about half a million startups with employees per year, but there are about five times more businesses without employees than those with, so I figure anywhere from half a million to two million startups per year in the U.S. alone. The Angel Capital Association says there are only about 75,000 angel investments and 5,000 venture capital investments per year, and many of those are duplications, second and third rounds, or new investments in already-existing companies.
Those numbers make sense to me. After all, outside investment is a special case in startups, related to the best of the best, normally only startups with a lot of potential growth, experienced teams, and product-market fit. Investors need companies that aren’t just likely to succeed, but likely to succeed and sell out within five years or so.
What doesn’t make sense is how many people think the natural, normal process of starting a business involved getting somebody else’s money. That’s the exception. The rule is elbow grease and shoe leather, struggling to get the first customers, focusing on a subset of the larger vision, starting with what you have, not what would be ideal. This is the realm of the normal, in which entrepreneurs turn to friends and family for help, they borrow from house equity, and they work their startup in their spare time. And sometimes, when they have a business plan and some minimal startup resources, they go to their local banks and get an SBA-guaranteed loan through the bank.
For those who complain that they can’t get startup investment, as if that were a natural right, I say welcome to entrepreneurship. Nobody is entitled to startup investment. Build a startup that’s a good investment, and you’ll get investment. Do the work.
2. Nobody invests in business ideas.
No offense, but your idea, no matter how good, has no value. What gives it value is the work involved in getting started. You develop the idea, gather a team, do a product prototype or minimum viable product, and prove the concept with actual users, subscribers, customers, distributors, or whatever consists of traction in that business.
You don’t even own that idea. If it’s an invention, you have to design and describe and win a patent to own it. And patents don’t always protect against imitations. You can own a creative work with copyright, which covers books, software, pictures, and art. You can own commercial words, images, sounds, and such with trademark. But you don’t own a business idea.
Companies don’t buy ideas. They don’t even listen to idea-holders wanting to pitch ideas.
3. You have to do the work.
A business idea doesn’t make you an entrepreneur. It doesn’t entitle you to investment. It puts you in the same boat as the rest of us, facing the journey of execution that turns an idea into a business of value. You aren’t entitled to financing; your business has to earn that with milestones met and progress made.
Does that sound daunting? Here’s the good news: If you’re there, at the start of the journey, you’re in good company. Millions of entrepreneurs have done that already, the vast majority of them without somebody else’s money to help. Solve a problem, give value, make the world better for your potential customers, and you can do it. Do the work.