Try this: take a step back from your phone, your FaceBook, and your daily routine, clear your mind, and think about the large-scale institutions that need change. What markets to disrupt?

It’s going on three years since Fred Wilson of AVC did this excellent Google talk on disruption. What markets really need disruption? He said consumer finance, energy, education, and health care.

I’ve read more than 100 business plans in the last 8 weeks, and considerably more than half of them promised either “disruptive” or “game changing.” One or two of them might me.

I’d say there’s been movement in consumer finance over the last three years, and maybe in energy, but not much at all in education and health care. A lot of sound and fury, perhaps, but signifying nothing. Lots of online courses, especially for adult education. Lots of universities offer online courses, led by the likes of Harvard, M.I.T, and Stanford, including a lot of online institutions and new ideas like Kahn Academy and udemy. But not of this does much to change the basic model of one teacher and two or three dozen students in a classroom.

To me it seems like nobody’s dealt well with the problem of keeping younger kids engaged and learning by some other means than the traditional model. Or the validation and certification that comes from diplomas and lots of hours sitting in seats. Do you agree?

And then there’ s politics. In the U.S., at least, politics doesn’t work. Wherever you stand on the political spectrum, I bet you agree that our system is totally obsolete on fund raising, advertising, issues discussion, partisan politics, and the actual voting mechanisms themselves. Do you agree with the need for disruption there too — the business of politics, if not the core of politics and political parties. And the business of political discussion, and issues?

What is still true today, as it has been for a couple of generations, is that truly disrupting a market can mean a huge business win. For startups and whoever invests in those startups.

It’s pretty amazing that the video is from five years ago and has been viewed something like 500,000 times.

Even though in the years since, I’ve done a lot more pitch coaching with a lot higher production value, it turns out that there is not much I would change in the content all these years later. Good luck with your fundraising.

If you are going to be a real entrepreneur, it’s important that you know yourself well. After all, you won’t have a direct manager charged with giving you feedback, and your team probably will be afraid to tell you what they really think. Entrepreneurs need to recognize their own strengths and limitations.

In any case, your skills, talent, knowledge, personality, and strengths are your best assets as an entrepreneur. I’ve extracted many of the following points about knowing yourself from a book aimed at women professionals, called “Career GPS”, by Ella L. J. Edmondson Bell, Ph. D., but I see them applying equally well to every entrepreneur, man or woman. Let’s see what you think:

1. Self-knowledge builds confidence. Know who you are and make sure you’re comfortable in your own skin. It will help you be a strong, effective leader. But don’t overdo it. We all know people who act supremely sure of themselves, but they are usually trying to hide some deep insecurities or fears.
2. Self-awareness is one cornerstone of effective leadership. Leadership isn’t about how big your role is, or how big you act. Self-aware leaders are able to see the larger picture, the context and purpose. They actively listen and don’t put themselves ahead of others. They allow others to be the best they can be.
3. Being sure of who you are allows you to make sound business decisions. When you are running a startup, having a better sense of who you are and what you want can help you push away things that are not really important, and urge you to go after the things that are really in your heart.
4. Knowing, accepting, and liking who you are encourages others to do the same. Being authentic and genuine makes you attractive to your customers, respected by your team, and effective as a leader. Individuality is the hallmark of a successful and strong entrepreneur.
5. Understanding your wants and needs helps you say “no” when necessary. Startup businesses are very demanding. You’ll be expected to be present just about 24/7 while keeping everything else in your life managed. Knowing your limits – just how far you can stretch before you break – is an important skill.
6. Know all of you – the good, the bad, and the ugly. No one, even the best of us, is all good. The good encompasses the parts of ourselves that are our natural gifts and treasures. The bad are those parts that need work. The ugly parts are generally hidden, especially from ourselves. Use the good, fix the bad, and learn to live with the ugly.
7. Knowing yourself allows you to maximize performance. There’s more to being successful than working hard. You have to be able to create a winning business plan, cultivate relationships, and build your brand. Work smart and focus on results in everything you do. This will reduce stress and increase satisfaction.

When you understand how you work most effectively, you will do a better job of delegation, use of outsourcing, and selection of partners and employees. Figure out what you love to do, and what you can do well, then hire people to complement your abilities.

If you are by nature a big picture person, and have trouble with follow-through, then you need to find a detail task manager to fill in the gaps. On the other hand, if you get bogged down in systems details when you should be working on the long-term strategy, get yourself a mentor to keep you on the right path.

In fact, there has never been a better time or more opportunities for entrepreneurs. The current economic recovery demands a transformation of business processes and cultures, beginning at the startup level. Now is the time to know yourself and believe in yourself – and use this power to win.

I had in interesting discussion at the University of Texas Venture Labs Investment Competition last week. One of the teams there included husband and wife and wife’s father, with a very interesting business plan that I hope succeeds. They asked me to what extent family ties affect angel investor or venture capital interest.

Why me? Presumably because my wife and I own our business and our daughter is CEO and her husband COO. We did raise venture capital for the business, but not until we didn’t need it. At the time we had more than $5 million in annual sales, no debt, and positive cash flow. 

Unfortunately, most investors look askance at a startup with family members working together. For example, I was once in a group of investors that automatically ruled out the best plan in the group because it was lead by two brothers. I objected, but I was a minority of one, in a group of two dozen. 

So should a family-led startup stop looking for investment? No. They should research their target investors carefully to rule out prejudice based on family business. That’s not just a special case. In fact, every startup that needs investment should be pitching only to investors who have basic compatibility of goals, industry experience, and ways of working together.

This is always good advice: Choose an investor like you would choose a spouse.

And for sibling teams, or spouses, or two generations, prepare some extra due diligence information to address investors’ legitimate doubts. Ask yourself how will you answer questions about decision processes and decision hierarchy. Do you cross conversations between family lines and business lines? Do you have a family business code of conduct? Can you show an organization chart with clearly defined areas of responsibility for the various family members? Can you talk about how this works in practice. 

You can also point out that there are also worries about lines crossing when friends create businesses together. And you can remind them of outstanding successful sibling or husband-wife teams like Heidi and Peter Roizen, Doug and Gary Carlston, and Michael and Xochi Birch. 

What investors want, in my experience, is a good investment with a good risk-return relationship and a reasonable shot at high growth, scalability, defensibility and successful exit. When family members have what it takes to make that happen, you have the advantages of loyalty, compatibility, and hard work. 

You can’t succeed in business without an operational model that delivers value to customers at a reasonable price, with an underlying cost that allows you to make a profit. There are no “overrides” – for example, businesses don’t thrive just because they offer the latest technology, or because everyone wants to be “green, or because their goal is to reduce world hunger.

I expect that should seem intuitive to all entrepreneurs, but every investor I know has many stories about startup funding requests with major business model elements missing. The most common failures are solutions looking for a problem, lack of a defined market, and giving away the product.

There are dozens of sources to help you construct your business model, and a good example is a recent book by venture capital investor Elizabeth Edwards, simply named “Startup,” which is really designed as a handbook for launching a company for less. I support her assertion that a business model consists of at least the first seven of the following ten basic elements:

1. Value proposition. What is the need you fill or problem you solve? The value proposition must clearly define the target customer, the customer’s problem and pain, your unique solution, and the net benefit of this solution from the customer’s perspective.
2. Target market. Who are you selling to? A target market is the group of customers that the startup plans to attract through marketing and sales their product or service. This segment should have specific demographics, and the means to buy your product.
3. Sales/Marketing. How will you reach your customers? Word-of-mouth and viral marketing are popular terms these days, but are rarely adequate to initiate a new business. Be specific on sales channels and marketing initiatives.
4. Production. How do you produce your product or service? Common choices include manufacturing in-house, outsourcing, off-the-shelf parts. The key issues here are time to market and cost.
5. Distribution. How do you distribute your product or service? Some products and services can be sold and distributed online, others require multi-level distributors, partners, or value-added resellers. Decide whether the product is local or international.
6. Revenue model. How do you make money? The key here is to explain to yourself and to investors how your pricing and revenue stream will cover all costs, including overhead and support, and still leave a good return.
7. Cost structure. What are your costs? New entrepreneurs tend to focus only on product direct costs, and underestimate marketing and sales costs, overhead costs, and support costs. Test your projections against actual published reports from similar companies.
8. Competition. How many competitors do you have? No competitors probably means there is no market. More than ten competitors indicates a saturated market. Think broadly here, like planes versus trains. Customers always have alternatives.
9. Unique selling proposition. How will you differentiate your product or service? Investors look for a sustainable competitive advantage. Short-term discounts or promotions are not a unique selling proposition.
10. Market size, growth, and share. How big is your market in dollars, is it growing or shrinking, and what percent can you capture? Venture capitalists look for a market with double-digit growth, greater than a billion dollars, and a double-digit penetration plan.

Investors will want to understand your business model very well and very early. They don’t want to hear your customer sales pitch, which naturally avoids any discussion of how much money you intend to make, and how many customers you expect to convince. Giving that pitch to investors will only frustrate both you and them.

A viable and investable business model is one of the first things you need to highlight in your business plan. In fact, without a business model, your startup is just a dream.

Entrepreneurs tend to focus on opportunity rather than risk, and rightly so.  As Steve Blank has written, at its core, a startup is an organization formed to search for a repeatable and scalable business model.  In the lexicon of the lean startup movement, once “product-market fit” has been achieved, the focus shifts to scale and execution as the startup matures into a growth company.

In a sense, risk and opportunity are two sides of the same coin to early stage startups.  The huge risk that eclipses all others is that the product or service being offered simply won’t succeed — there is no product-market fit, at least at numbers that would make for a financially viable business — in which case (assuming competent execution) the perceived opportunity, viewed broadly, wasn’t really there to begin with.Perhaps it shouldn’t be surprising that risk items on which legal and financial experts focus seem like afterthoughts to many startups.  After all, if value isn’t created in the first place, isn’t it premature to worry about its impairment?  Even at large corporations, legal departments are jokingly dubbed the “Department of Sales Prevention” because of their tendency to insist on the elimination of all risk from deals.

Relatively speaking, many claims such as consumer class action litigation or patent troll suits fall into the “good problem to have” category:  If a company has grown large enough that it’s perceived as having “deep pockets,” or others feel threatened and are willing to invest resources in fighting some of these battles, that makes it successful by definition.  Yet there are also existential legal risks that make some business models unworkable from inception, as entrepreneurs have found out the hard way.

A word about the title of this post:  I’m not using “wrong” in any moral sense, but rather to refer to running afoul of the law in a way that makes for bad business.  The very notion of intellectual property is a construct of legislation and court decisions made by fallible humans, riddled with exceptions, inconsistencies and ambiguities.  We do the best we can under the circumstances, but in the age of social media, taking an expansive view, virtually every person who has touched a computer has infringed copyright at some point, probably hundreds or thousands of times.  The law simply hasn’t kept pace with the largest upheaval in the distribution and consumption of content in human history, which has taken place in less than two decades since the consumer Internet was born in 1994.  To a large extent, members of the general public have little idea what copyright is, how it works, or how it applies online, if at all.  By contrast, how many items of merchandise have you shoplifted or cars have you stolen unintentionally?  To equate infringement with theft, as industry propagandists do, is to insult our collective intelligence.  But I digress.

In recent years, many of the most creative and disruptive startup businesses have involved the use of intellectual property in innovative, non-traditional ways that defy easy categorization and stretch the boundaries of concepts such as the fair use doctrine in copyright.  When presented with a product or service in development, we often have to admit that there is no clear precedent and look for the best analogous situation to assess legal risk.  Is Instapaper like collecting press clippings?  (If so, do you have to buy a copy of each paper first?)  Is pinning a photo or article on Pinterest more akin to showing someone an article in a magazine you’ve bought or actually making and handing them a copy?  Does using a friend’s photo in a Facebook ad more closely resemble a personal recommendation by that friend to buy the product or plastering the friend’s photo on the product packaging in stores?

At the height of the “cyberspace exceptionalism” era in the mid-1990s, the giants of the Internet industry were sufficiently worried about these risks that they invested heavily in lobbying Congress and helped shape the legal landscape of the social Internet.  Unlike startups, companies like AOL, AT&T, etc. had the clout to take on the content industry and strike a balance in copyright law that ensured their survival.  As I’ve written before here at Gust, the social media explosion of the 2000s owes its very existence to their efforts.  Nevertheless, the DMCA is showing its age with the advent of new communication tools (Twitter), content rendering platforms (Flipboard), curation formats (Pinterest) and even media consumption devices (iPad).  What strikes the engineer or entrepreneur as brilliant and disruptive may come across to threatened incumbents as dangerous and illegal.

One poster child for this type of innovation is the original MP3.com’s introduction of a service called “My.MP3.com” way back in 2000.  Its “Beam-It” tool enabled users to take music CDs they had already bought and upload them to an online “storage locker” of sorts (what we would now call “cloud storage“) from which they could then access the music anywhere on any compatible device.  To implement the service, MP3.com bought a huge number of CDs — virtually every music CD available at the time — and made digital copies on its servers.  A user could authenticate his or her physical CD and get access to the same tracks on the system without having to upload the actual song files.  The benefits of this kind of system are clear:  In the pre-iPod era, making one’s entire CD collection available anytime, anywhere was a vast improvement over carrying CD caddies around with scores of discs.  (Remember them?)  In the digital domain, the system also eliminated the tremendous redundancy involved if hundreds of thousands of music fans were to independently upload identical digital copies of the same tracks from the same albums to their personal “digital lockers,” with corresponding savings in bandwidth, storage, and time (“data deduplication”).

My.MP3.com was a bold, innovative cloud music service a decade before cloud storage became commonplace.  As they say, no good deed goes unpunished, so it was essentially sued out of existence by the recording industry.  Without getting bogged down in details, a service catering to consumers who owned legally purchased CDs furnished by a company that had also bought legal copies of the same CDs, making users’ music consumption more convenient and enjoyable while minimizing the burden placed on the related digital infrastructure, was crushed under the weight of century-old copyright law in the form of a $53 million settlement with one record label alone, plus many others.

If this product sounds vaguely familiar, it’s because Apple introduced virtually the same music service, branded iTunes Match, in November 2011 (count ‘em, eleven years later) as part of its iCloud suite of cloud storage and computing services.  Presumably it helps to be one of the world’s most valuable companies controlling the most valuable music distribution platform on the planet when negotiating deals with labels and publishers.  In any event, the lesson for new startups is to look both ways before crossing the busy IP highway.  Next week I’ll get into a more contemporary copyright controversy involving one of the most popular social media sites, Pinterest, and lessons learned for new startups and their investors.

I remember the first tech bubble well. True story: In 1998, one prominent online vendor — long since dead, by the way — was selling my company’s product for $66 when the distributor price was $76. Also true: In 2000, a would-be acquirer flirting with buying Palo Alto Software for its web traffic, but wanted to leave out our $5 million revenue stream because “that would lower valuation.” 

And yet, despite that memory, last week I found myself suggesting to a local web software startup that they might be better off scrapping their so-called business model and just aiming for disruption, not revenue. 

Theirs is of course a special case. I saw a demo last week. Their software, though not yet released, looked to me like it could so cool that it could go viral. By viral I mean remarkable in the popularized-by-Seth-Godin sense of something so good that users tell other users quickly. Every user generates additional users fast. And it could also be disruptive. By disruptive I mean really changing the way a lot of people do things. I’d like to tell you about the company but for reasons not worth spelling out that might be inappropriate until middle May. 

However, this is the second time in three months I’ve suggested to a software startup (different startups) that they might have to choose between being disruptive and charging money to cover costs. Which strikes me as dangerous advice. Hit it really big or go broke. It certainly heightens the risk. 

To make it interesting, I found Nick Bilton’s With No Revenue, an Illusion of Value on the New York Times bits blog last weekend. He argues the exact opposite point:

When this next bubble pops — and it will pop — the idea to make no money can finally pop, too. Then investors can start working with companies to build businesses that have long-term financial goals, instead of just building a short-term mystery.

However, uncertainty is a sign of intelligence. I think. Maybe. So I’m not sure. 

Still, look at the big winners of the last few years: Facebook, Twitter, and Instagram, for example. Valued in the billions of dollars. Entirely free to users. And, although Facebook now makes billions in revenue, revenue was not the point in the beginning. Revenue in fact would have killed their growth. Do you agree? 

So there’s the dilemma: disruption vs. revenue. 

That is, at least, until some big crash of publicly-traded stock and visible valuations of top-grade startups because fashions changed and analysts started liking revenue. If that ever happens. My favorite tech bubble analysis this week is by Chris Dixon, whose thoughtful piece here includes a nod to disruption vs. revenue: 

The argument that sometimes startups get better valuations without revenue is somewhat true. As Josh Koppelman said “There’s nothing like numbers to screw up a good stories.” This is driven by the psychology of venture investors who are sometimes able to justify a higher price to “buy the dream” than the same price to “buy the numbers.” This doesn’t mean the investors think they will invest and then get some greater fool to invest in the company again. For instance, at the seed stage, intelligent investors are quite aware that they are buying the dream but will need to have numbers to raise a Series A.

What do you think? Is a valuation crash coming? Does even asking the question make it more likely? 

(Note: I apologize for defining viral and disruptive when you already knew what I meant. I like to explain those jargon buzzwords when they come up.) 

It’s a long way from an entrepreneur’s “idea” to a working product with a real market and paying customers. A necessary intermediate step for proof of concept, credibility with potential investors, and communication with your team, is a working prototype. Building a prototype should be an early and high priority task for every startup.

A prototype doesn’t need to look great, or be built to scale, but it better accurately translate your vision into something real and tangible. For less tangible products, like software, it should simulate the look and feel of the final product on relevant base hardware. Here are some key objectives to keep in mind when designing your prototype to make it attractive to investors:

1. Validate the customer need and opportunity. I always hate it when I see startups invest millions of dollars in technology before they validate their ideas in the market, only to find that customers seem to be looking for something slightly different. Test your idea early in a form that is easy and inexpensive to modify.
2. Demonstrate to you and your team that your idea is implementable. No matter how strong your vision and theory, you won’t know for sure until you see it, that it really works. Even the best ideas often fail. Even when it works, key members of your team may not understand it all until they can touch and feel it.
3. Leverage the technology to change directions as needed. In these days of rapid change, almost every startup has to adapt their solution, business model, or target customer. A pre-production prototype will allow you to be adaptive without dire consequences.
4. Convince potential investors to take you seriously. Angels and venture capitalists are all about reducing the risk. Per the above points, if you have a validated a working prototype, investment risks are dramatically reduced. These days, if you don’t have a proven prototype, investors probably won’t even talk to you.
5. Early start on testing performance, materials, and quality. Work with the prototype will help you determine the best materials, like metal versus plastic, to assure acceptable performance and durability. Don’t wait for the final production model to find out that your product has a weak link in one of the common environments.
6. Basis for working with vendors to finalize costs, manufacturing, and marketing. After the market and product have been validated, the real challenge comes. You need to find vendors who can deliver in less cost and time than competitors, and build distribution and support channels. A prototype is the three-dimensional version of your vision.

There is nothing wrong with starting simple, engaging a friend who does mechanical design, or a student at a local industrial design school. In fact, many universities have expert professors, graduate students, and laboratories in all the key technologies, and they may be happy to do the work for you, if they can use it for class projects and Government Grant applications.

If you are ready for the next stage, it’s easy to find commercial resources on the Internet, like ThomasNet, a one-stop database of 650,000 manufacturers, distributors, and prototype developers, covering every state and country. There are new methods of prototyping, like stereo-lithography, which allow plastic prototypes to be made directly from computer drawings for a few hundred dollars, rather than waiting for injection molding at more than $10,000 per item.

Even at early stages, you can get invention support services from sites like Invention Home in Pittsburg. Just don’t get carried away here, and remember that the invention process is risky, with only a small percentage of inventions or products succeeding on the market. There is no magic, so don’t spend all your money assuming that these companies will guarantee your success.

Don’t skip the prototype stage for all the business reasons listed, and because it is a great way to explore possibilities, and have fun using your creative juices. The prototype is where you really bring your product idea to life, for yourself, as well as for everyone else.

It’s too soon for rigorous data analysis. I don’t have surveys. But I’ve been through about 120 startup business plans in the last month and it seems like there’s a big shift. There’s a lot more science and a lot less web. There’s a lot more save the people, save the world, than there is save the web. 

I’m talking about what I’ve seen as a member of a local angel investment group and a judge at four business plan competitions. This is just anecdotal. Still … it’s been a long time since I’ve heard somebody promise the next Facebook, or next Twitter, or next Netflix. Five years ago it seemed like almost always web technology, laced with an occasional big pharma plan that was going to take $20 million and 10 years.

Today it seems mainly medical, clean tech, laced with consumer businesses and the rare web business. Earlier this month, Lifeline Innovations, a new technology for vaccine, won the University of Oregon New Venture Championship in Portland. Second place Boston Mountain Biotech and both of the two runners up were all medical/biotech plans. And at the Rice business plan contest in Houston, the following week, the winner and four of the other five finalists were all medical biotech.

Yes, I do know that my impression is different from the statistics you find here on gust.com, which indicate 21% of startups were Internet and web services last year, plus 7% software, compared to only 4% medical devices and 4% healthcare. But then these statistics from statistic brain.com, compiled from a number of different sources, indicate healthcare /medical got 30% of all angel investment in 2010, compared to 16% software, but with another 15% biotech. The trouble with all of these statistics is they depend on definitions and sources, so they don’t reconcile easily.

My best hunch is that the minimum cost of a web tech startup has declined so steeply in recent years, from a few million dollars to a few hundred thousand, that the investment flow, and returns, have changed. But that’s just my guess.

(Image: shutterstock.com)

All too many startups are founded simply on the basis of a new and exciting technology invented by an industrious technologist. This is the origin of the “solution looking for a problem” and “if we build it, they will come” syndromes, which result in surprise and frustration waiting for funding, and waiting for customers that don’t materialize.

The right approach is to start by solving a problem causing real pain to a large number of customers willing to pay real money for a solution. Develop the solution with your technology, and develop a strategy to maximize your impact in the marketplace. I’ve talked about the solution part several times, so this article will focus on the value of a strategy.

Here are five good reasons for setting the strategy early, as summarized by Mark Thompson and Brian Tracy in their recent book “Now, Build a Great Business!” They emphasize that before the “What” should come the “Why?” Although their book is written for businesses of all sizes, I believe the principles apply especially to startups as follows:

1. Increase return on equity invested. The first purpose of a strategy is to organize and reallocate your resources to increase return on the amount of money invested in your startup to-date. It is to earn more bottom-line profit-ability than a random walk.
2. Position yourself relative to your competitors. Business strategy allows you to change customer perceptions and responses to your product or service offerings. Don’t simply become a “me too” offering, but work on innovative approaches and changes in customer preferences that may not yet be covered by competitors.
3. Capitalize on strengths and opportunities. You must take advantage of those special team talents and product capabilities that make your startup superior to your competition, and do things that your competition cannot duplicate in the short term.
4. Form a basis for making better decisions. All strategic and business thinking must lead to immediate action to increase sales and profitability potential, relative to your competition. No strategy leads to no decisions or poor decisions.
5. Attract investors and financing. Look at your startup through the eyes of a potential lender or investor, and create a strategy and plans that make your company an attractive place to invest. The startups that typically receive the most dollars in first-time financings are ones that have at least four things going for them:
   • Experience in related fields. Investors highly prize gifted leaders who are business veterans with experience in similar ventures, who can move quickly and effectively.
   • Great business model. Your offering should open new, large markets in ways that are tough for competitors to copy quickly.
   • Scalability. Show that your business can build the necessary products and services rapidly and achieve economies of scale with minimum capital and labor.
   • Intellectual property (IP). Patent protection is no guarantee, but it does improve the chances of building businesses that have a sustainable competitive advantage.

Your business strategy starts with your value proposition and core competency. Most startups that find themselves struggling have a weak value proposition. This is why your value proposition is a critical piece of business strategy.

A successful startup, like chess, requires proper strategy, risk assessment, and effective decision making. Your focus on the end goal will dictate the choices you make, the ability to stave off threats, and lead to your success. Now it’s your move.