Grim Fairy Tales – Part III

This is the third in a six part set of blogs about “how not to raise money for your start-up”. The grim stories you read hear are based on real life events – meetings and conversations I have had over the years, and will no doubt form the basis for my next book.

So far I’ve covered Management in Part I and Valuation in Part II, this week we’ll take a look at USP.

When I worked in an EIS fund, USP was a short hand – not just its literal meaning of Unique Selling Proposition, but the whole idea of differentiation, competition, compelling need and reasons to buy. It was whilst digging around in the presenters understanding of their market – and marketability – that you discover how much (or how little) they know about the actual process of selling a product or service to an unsuspecting customer (whether they are a business or a consumer).

This whole area could fill a book (and has done many times) so rather than pick one example I can demonstrate with one of the classic pitfalls for a new business pitching for money, confusing USP with unique product.

You see, as an investor I also get a cold shiver when an entrepreneur tells me their product is truly unique. That there is nothing like it in the market. I’ll give you three reasons why, three things that the statement “we are totally unique” makes me think (and just ignore the fact that it is hard to be a little bit unique). Based on that statement I think one or more of the following statements will be true:

1. You don’t know your market.

This is often the case (not always). One of the advantages of working exclusively with early stage technology companies is that you get to see some very cool stuff. Not all the cool stuff will become a successful business, but some of it will. As a result of this, you tend have a reasonable finger on the pulse of what is going on in the markets you are interested in – and that includes new developments that you simply cannot find with Google. Sometimes though the competition is out there, easy to find and clearly position! Personally I have generally found that whenever someone tells me about their “totally unique” product I will see a very similar pitch from another start-up within two weeks with basically the same solution.

2. There is no market.

Sometimes you have to stop and think “Is there a reason no-one else is doing this?” and sometimes the answer is simple – there is no commercially viable market for the product or service. The reasons for this can be obvious – the product costs too much to make, no one wants it and sometimes you have to dig out your MBA notes and do a good old fashioned PEST analysis – and discover that regulation changes mean it will no longer be legal to sell your product!

3. You are genuinely the first in the space.

Not necessarily a good thing. You see, being first in the market means you are going to do a lot of learning with your investors funds. You will learn how to position and sell a completely new product, you will learn what features, functions and benefits your customers really value and you will learn where the price/demand curve really lies. And so will all the companies that come after you – with a lot less money.

So to go back to the point, USP does not mean you have a unique product – it means you know how to differentiate your product in your chosen market. The USP will derive from a clear understanding of your target market, their needs, the pricing required to compel them to buy, your competition, and the benefits which you can deliver and your competitors cannot (or cannot do so well).

That is why USP is shorthand for so much more!

Next time, Sales.

Permanent link to this article: http://www.concap.cc/2012/06/grim-fairy-tales-part-iii/