Todd Federman’s angel fund has evaluated more than 3,000 startups since its founding in 2006. Of those companies, it’s invested in just 53.
As managing director at North Coast Angel Fund, Federman sees many early-stage companies facing similar challenges — including long odds and a desperate need for cash. Avoiding common pitfalls and finding the right partners is critical to the survival of successful startups, such as Assurex Health.
“I specifically remember a time when a representative of Assurex was driving around the state, picking up checks for $10,000 and $25,000 from individual angel investors to make sure the company could hit the next payroll,” Federman says. “The company was developing a genetic diagnostic - and when it started, it had zero revenue. It had to complete the test and establish the laboratory that would conduct the test. So there was a significant burn rate every month that the company had to address with investor capital before it could see a penny of actual revenue.”
Through the support of North Coast Angel Fund, the young biotechnology company grew from nine people to more than 600 employees and over $100 million in annual revenue. In August 2016, Myriad Genetics bought Assurex Health for $225 million.
In this week’s Dealmaker Q&A, we spoke with Federman about common mistakes entrepreneurs need to avoid to beat the odds and monetize their ideas.
What questions should any entrepreneur answer before starting a business?
The biggest challenge is trying to determine, is there a product-market fit? Is there really a market need? Are you engaged in an industry where there is a big enough problem or a big enough gap between the problem and the desired end stake to build a business around it?
Often, you can look at a company and realize over time that it’s just not in the right place. The problem you’re seeking to solve either isn’t as big of a problem as you thought, people aren’t willing to pay to solve it or it’s just not somebody’s top public problem.
For example, if you’re attempting to solve a problem in the insurance industry, but it’s the No. 4 priority problem, it’s likely nobody will talk to you or want to buy it. They’re working on priorities one, two and three.
How difficult is it to align entrepreneurial skill with market need?
It’s absolutely a challenge to achieve alignment in the problem you’re seeking to solve, the solution you’re bringing and the team you have to solve that problem.
Let’s stick with insurance for a moment. The people who presumably would best understand the problems in the insurance industry and be able to bring solutions are people in the insurance industry. But most insurance startups we see aren’t people coming out of Progressive or Westfield or other insurance companies.
It doesn’t mean they won’t be successful. It just means - as part of the process - they need to do a lot of research. They need to partner with people in the industry. And they need to try to bring that expertise to their team in some way.
If I have a great idea for a business, what should I do next?
Don’t keep the idea to yourself. There’s a tendency for people to consider the idea that they have to be the primary asset of the business, which it almost never is. If you come up with a great business idea tomorrow, I’ll bet you $100 that 100 other people have come up with that idea in the last 60 days.
It doesn’t mean it’s not a great idea. It just means the real value creation comes on building a great team and executing against the idea. So by talking with other entrepreneurs, talking with investors, talking with people in the industry, an entrepreneur can increase the likelihood that they are successful.
Once you get started, it takes a very steady hand to not overreact, to not overcorrect. Be willing to second-guess yourself and ask questions, but only make major adjustments when the evidence tells you to do so. Not overreacting and not giving up on a concept before it’s had time to develop is important. That’s a combination of experience and instinct.
How can established business owners support a startup community?
The potential engagement of a large number of Cleveland’s successful entrepreneurs is probably the biggest untapped resource that we have as an entrepreneurial community. These people who have been successful in starting and growing their own companies have a wealth of experience that they can lend to other high-potential CEOs.
If you’re building a sales team, don’t you want to talk to somebody who has built a sales team? If you’re in a business where it’s all about successful channel partnerships, as an entrepreneur, wouldn’t you want to talk to a couple successful companies that have been successful in building channel partner strategies?
That level of engagement can make a big difference. Almost all net new jobs are created by high-growth companies, not by companies that are large already. If you really think about impact investing, consider the fact that these dollars that get deployed into growing businesses are creating jobs here in Northeast Ohio.