Is it a Business?

My run-rate for looking at businesses is over one a day, and rapidly approaching two.  I enjoy almost every meeting, and in fact cannot think of one that I have not found useful.  As a firm we end up investing in a very small proportion of what we see, perhaps one percent or so.  Of late, I have been meeting with a number of companies that in effect are features, and not businesses and a number that would work great if everyone would adopt their product.  Both of these are red flags to me.

So, what is a “feature”?  It is a business that is not a business, it is something that in itself is neat or cool that improves fun or efficiency.  It has no revenue model, and if successful can be copied by existing players or new entrants in the space.  It probably can’t be patented effectively and if could you would not have the resources to defend yourself.  It is the stuff dreams are made of, but often not businesses.  It is narrow in its application, or something that could be wide if everyone changed what they do today and do it differently using this new wizbang feature.  Businesses that start as features often spend a lot of energy looking to back into a business model.  A few make it.  Twitter?

This brings me to adoption.  The biggest area I have difficulty with, and where I am likely to disagree with an entrepreneur,  is with user adoption.  Start-ups want to change the world, and to do that effectively they often need to change behavior from “I would never Tweet” to “Twitter is where I get all my cool news” or from “the iPad will never take off” to “I watched two movies on my last trip and read 5 books, all on my iPad”.  The question is when you try to change the world will it change with you?  This comes down to user adoption curves and entrepreneurs’ vision as to the ease of take-up/deployment of their product.  Often they simply underestimate the difficulty of gaining customers.  The key question that they do not have a perspective.  Is this a problem?  Yes and no.  On the one hand they have to have an unreasonable belief and passion for their idea, because if they do not it will never happen.  On the other hand this can border on the delusional.  What is most essential is that the entrepreneur tries to understand why others question their adoption assumptions and then communicate effectively their perspective.  If you are raising money this can be the most difficult idea to get across.

I do not have a checklist when I meet with investors, but if I did these would be top of the list.