Many founders turn to venture capital firms, angel investors or incubators as a source of funding. Obtaining hundreds of thousands or even millions of dollars is not as simple as knocking on the door and asking for money. It takes careful planning and a focus on presenting your request in the best possible light. One that shows you have a serious proposition deserving of the investor’s time and money.

I work at a startup incubator and review hundreds of pitches a year. Most are on paper and video but some are invited to pitch in person. Over the course of these presentations, some interesting patterns emerge:

• • Everyone makes the same types of errors
  • The errors are not specific to raising capital but with the business concept or the founder’s attitude
  • Those who avoided just one of these errors stood out from the crowd

Are you making these errors in your business (start-up or not)?

Invalid competitive advantages

“Superior SEO” and “unique features” are not competitive advantages.

Lacking an unfair advantage

You need one killer advantage no one can beat (because you might get beaten on everything else!).

No one said they’d buy it

You don’t need statistically significant studies, but it’s astonishing how many blaze ahead before they’ve found even a single person willing to give them money.

Incorrect positioning against the competition

The two faults here are opposites: Believing that uniqueness means competition doesn’t exist, or defining yourself by the competition instead of constructing your own message.

No significant route to customers

If your marketing strategy is to run A/B tests and build RSS subscribers, you’ve already lost.

ERROR: Invalid competitive advantages

Every pitch I see has a section on competitive advantages, and nearly every time the claimed competitive advantage is not, particularly when everyone else claims the same advantage as you!

The following are not competitive advantages:

We have feature “x”

This is an advantage only until others copy it, so it’s not a long-term protection against competition. Indeed, the next company can observe what works and what doesn’t, and then improve on your innovation.

We have the most features

It’s common for older products to compete on having more features than newer, competing products. The trouble is, customers rarely want more features, they want the right features. As everyone adds features, products reach critical mass where all have 80% of the features customers want, and then having “more” is no longer an interesting selling point.

We’re patenting our features

“No one can compete with my blog because it’s copyrighted.” Silly, right?

That’s what it sounds like when claiming a software patent will protect you from competition. Except in certain industries (e.g. food, drug, medical), I’m unaware of companies who stave off quality competitors through patent holdings. Every mp3 player uses multiple patents, but that didn’t stop Apple from winning.

We’re better at SEO and social media

80% of Americans believe they are better-than-average drivers. Can’t be true, right? Well 80% of folks I meet tell me they’re better than average at SEO, Twitter, and “building communities” (whatever that means).
Social media and SEO is ever-changing quicksand. You’re on top of Google today, gone tomorrow. Other companies being good—or better—is completely outside your control, so claiming you have a sustainable advantage is poppycock.

We have three PhDs/MBAs

The landscape of successful startups is littered with people lacking post-graduate education. If you’ve lived in the software world you know what they teach you in school is often irrelevant, so who cares what degree you hold? In all the interviews you’ve read about founders’ success, how many credit their MBA program? How many even have MBAs? It’s not bad to have a degree, but neither is it a significant advantage.
We work hard and we’re passionate

You hear about guys working 30 hours per week (or less), so you figure if you work a “healthy” 70 hours per week, you’ll win! But working harder is not, in fact, smarter. And even if you could work 70 on-task hours per week, that’s still blown away by 10 developers at a well-funded company or even 10 passionate open source developers working part-time. And who doesn’t have passion? But in this context it’s like saying, “My children are going to be more successful because I love them more than you love yours.”

We’re cheaper

It’s not bad to be cheaper. The key is you cannot compete solely on price because all a competitor has to do is lower their price. Established companies can destroy you with the “loss leader” strategy. Remember when Microsoft put hundreds of developers on Internet Explorer and gave it away for free, destroying the market for web browsers?

LESSON

So where does that leave us?

You live in the era of a flat world where millions of people have access to technology, education, and a powerful sales, marketing, and communication platform (the Internet).

You live in the era where the most powerful programming frameworks and tools are free, local broadband and high-availability servers are cheap, and world-class people are willing to work 60 hours/week in exchange for free food and the chance to be part of a cool new startup.

There’s too much energy, availability, intelligence and opportunity in the world to hide behind outdated notions of intellectual property. Almost anything can be copied. In fact, I’d claim that anything of any value will be copied. It should be part of your business plan that other people will copy you.

ERROR: Lacking an unfair advantage

Fortunately there’s plenty of ways to have true advantages that competition cannot readily overcome. Unfortunately, they’re difficult and rare. And you thought creating and running a successful, untouchable startup was easy?

How would you answer “What if a big company copies your idea and develops the same website as yours after your website goes public?”

Not the right question! The one you should answer is: What are you doing now knowing that a big company will copy your idea? No, wait, the real question is: What are you going to do when another smart, scrappy startup copies your idea, and gets $10M in funding, and is thrice featured on TechCrunch?

No, wait, I’m sorry, the real question is: What are you going to do when there are four totally free, open-source competitors?

No, wait, I forgot, actually the question is: What happens when employee #2 makes off with your code and roadmap and marketing data and customer list and starts selling your stuff world-wide at one-tenth the price?

The good news: There are answers to all these questions!

The bad news: Almost no one I talk to has good answers, but they think they do. And that’s fatal, because it means they’re not working towards remedying that situation. Which means when one of the above scenarios happens, it will be too late.

Anything that can be copied will be copied, including features, marketing material, and pricing. Anything you read on popular blogs is also read by everyone else. You don’t have an “edge” just because you’re passionate, hard-working, or “lean.”

LESSON

The only real competitive advantage is that which cannot be copied and cannot be bought.

Like what?

Insider information: The only way to consistently make money on Wall Street is to have insider information! Although it’s illegal (and people occasionally go to jail for it), those in the know will tell you it’s not uncommon. But, using intimate knowledge of an industry and the specific pain points within an industry is a perfectly legal unfair advantage.

Here’s a real-world example. Adriana has been a psychiatrist for 10 years; she understands the ins and outs of that business. During a lull in her practice she got an opportunity to shift gears completely and ended up leading software product development teams. (Turns out that for big-business project management it’s more valuable to be a sensible thinker and counselor than to be an expert in debugging legacy C++ code.)

Now Adriana has an epiphany: In her opinion, traditional practice-management software for psychiatrists is not very good; she knows both the pain points and the existing software first-hand. But now she has the vision and ability to design her own software.

Adriana holds a unique position: Expert in the industry and able to “geek out” with her target customer, yet capable of leading a product team. Even if someone saw Adriana’s product after the fact, it’s almost impossible to find a person—or even assemble a team—with more integrated knowledge. At best, they could copy. Of course by then Adriana has moved on to version two.

Single-minded, uncompromising obsession with One Thing A “Unique Feature” could be a competitive advantage in some circumstances. Some examples of a feature being a company’s primary advantage are:

• • Google’s search algorithm was just better, therefore they won the eyeballs, therefore they were able to monetize. Sure, others are good now, but the advantage lasted long enough.
  • Photodex is a little company you’ve never heard of where I worked in the 90’s. We made an image browser with thumbnail previews so you didn’t have to open each file individually to see what it was. Our advantage was speed. Not the best, not the most stable, didn’t read the most formats, didn’t have the most features, just “fastest.” For many users of that product, speed wins.

However it’s not enough for a feature to merely be unique because it’s still easily duplicated. Rather, this requires unwavering devotion to the One Thing that is (a) hard, and (b) you refuse to lose, no matter what.

Google has spent hundreds of millions of dollars on their search algorithm, the single biggest focus of the company even today, a decade after they decided that was their One Thing. They refuse to be beaten by competitors or black-hat hackers, whatever it takes.

37signals can build simple software and earn three million customers because they absolutely will not compromise on their philosophy of simplicity, transparency, and owning their own company, and that’s something millions of people respect and support.

To remain un-copyable, your One Thing needs to be not just central to your existence, but also difficult to achieve. Google’s algorithm, combined with the hardware and software to implement a search of millions of websites in 0.2 seconds, is hard to replicate; it took hundreds (thousands?) of really smart people at Microsoft and Yahoo years to catch up. 37signals’ platform—a blog with ~140k followers and a best-selling book—is nearly impossible to build even with a full-time army of insightful writers.

Being “hard to do” is still a true advantage, particularly when you devote your primary energy to it.

Personal authority

Chris Brogan commands thousands of dollars for a single day of consulting in an industry (social media marketing) where all the information you need is already online and free. Joel Spolsky makes millions of dollars from bug tracking software—an industry with hundreds of competitors and little innovation. How can you earn this overwhelming advantage?

Unfortunately all this “authority” takes years of expensive effort, and even then success is probably due as much to luck as anything else. So is it worthwhile? Yes, exactly because it takes years of effort and a little luck.

Authority cannot be purchased

You can’t raise VC money and then “have authority” in a year. A big company cannot just decide they want to be the thought-leader in their field. Even a pack of hyper-intelligent geeks cannot automatically become authorities because it’s not about how well you can code.

But how does authority convert to revenue?

Here’s a personal example: I give talks on peer code review at conferences. My competition pays thousands of dollars for a booth, then spends thousands advertising to attendees begging them to visit the booth, then gives sales pitches at the booth to passersby who are also being bombarded by other pitches and distracted by the general hubbub.

Whereas, because I’m a known authority on code review and software development, I get to talk for an entire hour to a captive, undistracted group of 100 people, self-selected as interested in code review. After the talk, many people want to chat one-on-one. Some head straight to the booth to get a demo; for many I give a private demo of the product on sofas in the hallway. It’s not unusual to get several sales over the next three months from people who saw me speak.

Now add to that the effect of a blog that tens of thousands of people read? And the effect on sales of my book on code review?

Earning authority is expensive and time-consuming, no doubt. But it’s also an overwhelming, untouchable competitive advantage.

The dream team

The tech startup world is littered with famous killer teams: Gates & Allen, Steve & Steve, Page & Brin, Fried & Heinemeier Hanson.

In each case, the founders were super-smart, had complementary skill sets, worked well together (or well enough to reach important success milestones), and as a team represented a unique, powerful, and (in retrospect) unstoppable force.

Of course that’s easy to see in retrospect, and retrospect is a terrible teacher, but the principle can work for any startup, especially when your goals are more modest than being the next Google.

Of course a Dream Team doesn’t guarantee success but it significantly reduces the risk of a startup, and is difficult for the competition to duplicate.

This is especially true when someone on the team is already successful in their field, e.g. with a massively successful blog, or big startup success, or a ridiculous Rolodex. Since those are the kinds of competitive advantages that can’t be bought or consistently created, having that person on the team is by proxy a killer advantage.

Existing customers

Everyone you’ve ever sold to possesses the most valuable market research imaginable, and it’s the one thing a new competitor absolutely will not have.

This is kind of a cheat, because everyone says “I listen to my customers,” which (nowadays) is just as overused as “We’re passionate,” but it’s true that if you’re actively learning from your customers and you never stop moving, creating, innovating, and learning, that puts you ahead of most companies in the world.

As a company becomes successful it gains momentum, which means it’s going in one direction with one philosophy. Like physical momentum, change becomes harder to affect.

Of course the world is changing, and in particular your customers are changing. Normally this leaves room for the next competitor, but if you’re already entrenched you can leverage your existing status, insider knowledge, and revenue stream as long as you’re willing to change too.

You have more money, you’re better known, you have existing happy customers to help spread the word, you have employees to build new things, and you have more experience with what customers actually do and need, which means you should have the best insight.

Any new competitor would kill for just one of these advantages. If you’re not using them, how silly is that? Companies don’t get killed by competition; they usually find creative ways to commit suicide.

Imitation might be the sincerest form of flattery, but it still stings when someone does it to you.

Of course you can still battle it out in the marketplace, but you need something that can’t be duplicated, something they could never beat you on, then hang your hat on that and don’t look back.

ERROR: No one said they’d buy it

Of hundreds of startup pitches I’ve heard, almost none had unearthed ten people willing to say, “If you build this product, I’ll give you $X.”

Meditate on this: Hundreds of people ready to quit their day jobs, burn up savings, risk personal reputation, toil 70 hours per week, absorb as much stress as having a baby (believe me, I’ve done both)…. all without identifying even ten people actually willing to pay for what they’re peddling.

Short-sighted, no? If you can’t find ten people who say they’ll buy, your company is dead before it starts.

“I’m scratching my own itch. Since I’m my own target customer, I already know what to build.”

Oh! I didn’t realize your typical customer is observant enough to recognize monetizable pain, creative enough to invent products, able to convince others to work for free and invest money and time with you, and passionate enough to quit their job to pursue unproven ideas.

By definition, if you’re a startup founder you’re explicitly not your customer.

“Scratching your own itch” is just a start. It’s the spark of inspiration, not the strategy. It’s the grain of sand tickling the oyster, not the pearl. In fact I challenge you to find one founder of a real business who thinks “I’m the customer” is the only market validation you need.

“There are millions of potential customers, so it doesn’t matter what only ten of them think. I need to just start; later I can survey and learn something statistically significant.”

If there are millions, it’s trivial to find ten. If you can’t find even ten, then either there’s not millions or those millions aren’t interested in you.

Businesses don’t start with millions of customers, they start with one, then ten, then a hundred, and then a thousand. But most don’t get past ten.

If you haven’t gotten ten to at least say they’ll buy, where do you get your hubris to proclaim that thousands actually will buy?

“My customers can’t understand mock-ups. I have to build it first.”

You shouldn’t need screenshots or slides to convince someone in your target market that what you’re doing is compelling. If your concept is so esoteric you can’t describe it in 30 seconds, it’s either too complex or you don’t understand it yourself.

Even if I concede that some folks can’t grok mock-ups, remember that your first customers will by definition be early-adopters who are OK with alpha software. If you can’t find a few of those and get them excited about your product, maybe your product isn’t exciting.

“I’m not good at sales/marketing; I need to build a product so compelling it sells itself.”

The world is filled with decent products that make no money! If your goal is a business (not a hobby), building charming, novel software isn’t enough.

You and I know you have the ability to build cool new software. We agree that will be fun and exciting. But that’s not going to create a business.

Writing code is what you love, so you myopically decide that’s what you’ll do. But what you should do is just the opposite: Attack the part of the business you’re least sure of, you’re least qualified for.

If you’re still not convinced, think of it as project risk management. In a big software project do you tackle the high-risk, ill-defined stuff first, or do you postpone that to the end? Obviously you address the unpredictable stuff first—most of the project risk is due to the unknown, so the earlier you can sort out uncertainty the more time you have to deal with the consequences.

I’m making the same argument, except the “high-risk unknown” is “everything that’s not code.” Your code will be good enough; it’s the other stuff that will probably sink your ship—unable to find customers or unable to convince the target audience they should open their wallets.

No sense in postponing it.

“My friend/brother/co-worker/dentist thinks it’s a great idea.”

Your mother thinks you’re smart and good-looking, but that doesn’t mean I do. It doesn’t matter what non-entrepreneurs think because they’re not versed in product/market fit or squeezing blood from evanescent budgets. In fact it only barely matters what real entrepreneurs think, because they’re not expert in your problem domain, they might have outdated notions, they might be biased against certain ideas and technology, and they carry baggage from good and bad experiences (due as much to timing and luck as anything else).

LESSON

The only thing that matters is that people are willing to give you money!

Business “experts” can argue all day that it makes no sense to buy shoes over the Internet, but as long as people give Zappos $1 billion per year, it doesn’t matter what experts say.

When ten people say they’ll give you money if you build this thing, that’s the only validation that counts.

ERROR: Incorrect positioning against the competition

After seeing hundreds of startup pitches, I can tell you the two most common errors in positioning a company against competition are, strangely, opposites:

• • Claiming you have no competition
  • Defining your company’s offering and positioning by combining “the best” traits of six competitors.

This isn’t just a problem when pitching—it’s a problem with you defining who your customers are, what they want, and your role in the marketplace.

Let’s break down the ways these fallacies manifest and what you can do instead.

There is no competition

Here’s what I hear and think:

• “I have no competitors.”
  Either you’re ignorant of direct competition, or you’re not considering alternate solutions like “build it yourself.”

• “No one is doing it like we are.”
  Of course you’re going to position your company with a unique offering: exclusive features, a distinctive culture, a refreshing pricing plan, an innovative sales strategy, etc. But uniqueness doesn’t imply lack of competition!

• “There’s no competition because this is an industry that has never used software to solve this problem.”
  I know that sounds like a good thing, but what this also implies is you’ll have to convince people to trust software, and that’s a disadvantage. You’re competing against the status quo.

• • “There’s no competition because people haven’t realized it’s a problem.”
    If they don’t already know they have the pain, the sales process is going to be excruciating. There’s a word for that—evangelism—which conjures other words: Expensive, difficult, time-consuming. Defining your company by the competition Your company is defined by its own strengths, values, customers, and products, not by how it compares with other companies. You need a strong position, something that would be equally clear and compelling even if competitors didn’t exist.

Here’s some ways this mistake manifests:

• “We combine the best traits of our competitors, letting them show the way to our success.”
  I like the idea that you can learn from the mistakes and successes of similar companies, but “combining the best” misses the point. There are specific tradeoffs each of those companies are making; things you see as “not best” might in fact be best for their target market. Why are you so sure your notion of “best” will result in enough customers who not only agree with you, but are so convinced they’re willing to switch to you?

• • The rubric.
    A chart with one row for each “feature” and one column for each of six “competitors.” There’s checks and X’s everywhere, except of course a glowing, highlighted column representing your company which just happens to be full of checks. Do you really expect someone to believe this?
  • “We’re just like competitor X, only we’re Y.”
    In this case you’re betting your future on the fact that Y is overwhelmingly compelling to a large market segment. X automatically has advantages over you (brand, customers, revenue, inside knowledge, a team, momentum), so Y had better be brain-exploding awesome. Oh, and it’d better be impossible for X to implement Y—or even one-third of Y—themselves. Talk about putting your fate in others’ hands!
• • “We’re the same as X, only cheaper.”
    Being cheaper is a strategy, but it can’t be your only strategy. It’s too easy for competitors to change price or offer deals. Typically the best customers aren’t price-sensitive anyway, so you’re actually biting off a less desirable segment of the market. Often this claim is paired with “We’ll do 70% of the features for 50% of the price,” but supplying less for less is not inspirational. So how do you look inward to establish your company, contrasting with the competition but not letting the competition dictate your identity?
  • We’re targeting the market segment defined by X, Y, and Z. We’ve spoken with 20 potential customers who match at least two of those criteria, and they agree our product is exactly what they need and none of our competitors are doing an acceptable job addressing their issues.
    • Our company has core value X that we exude everywhere from our SEO to our tech support to our product. (Example value: Simplicity. A simple product with few features, low-cost, pain-point obvious, not tackling complex problems, focused on making life easier rather than on saving money.) We own this value because we’re completely committed; this is the one point on which we will never compromise. Our customers know it and value this too, which is why it doesn’t matter what features, prices, or advertisement our competitors have.
    • This is the competitive matrix. Note that each player in this space is targeting a different market segment, as is clear from feature selection, pricing, and advertising/messaging. We, too, are targeting a niche; as you can see our offering is consistent with owning that niche, and doesn’t overlap significantly with competitors. It would be difficult for any of them to “switch” into our niche, because as you can see they’d have to change the product, pricing, and their company’s persona; that’s a risk we’re willing to take.
    • We’re going after competitor X. We know they already have a ton of advantages over us— well-known, well understood, and a deep feature list. However they haven’t done anything new in three years and we have evidence their customer base is not happy. Not only that, they’re famous for annoying attributes A, B, and C (Examples: buggy, slow, confusing, expensive, bad tech support). We see huge opportunity in their wake of destruction, vacuuming up their customers with our overwhelming advantage. They can’t do this themselves because they’re too big to turn the ship, and anyway the past three years have shown they’re not able to change.

LESSON

If you’re tempted to argue that you’re the exception, here’s how to elucidate the advantages you’re seeing, but in a way that actually makes sense as a business strategy:

• • We’ve carved out a niche specific enough that no one is actively targeting. There are similar competitors A, B, and C, but they’re not targeting this niche because of X, and would be hard for them to switch into this niche because of Y. In fact, it’s quite possible that we’d end up partnering with or being bought by A, B, or C because our idea is similar but out of their reach.
  • We’ve identified a market too small for the large, established players to address, but big enough to build a company. Because the 800-pound gorilla is inefficient at building new software, it can’t go after a market unless there’s a billion dollars at stake. We think there’s a solid business to be made in this hundred-million-dollar market. However, where the giant can’t afford to build this from scratch, if we show good growth and profits we would be an obvious acquisition target for them.
  • We’ve created technology so different from the incumbents that we’re changing the conversation about how people solve this pain. Though it’s different, your solution is very easy to describe and use (e.g. the way Netflix changed movie watching at home).
  • Our target customer has traditionally solved this pain themselves or just lived with the pain rather than paying for relief. A combination of newly-available technology and modern mindset makes this the right time for a new software play.
  • It’s true this industry hasn’t yet seen a software solution, but that’s not because they hate computers, but rather that it hasn’t been possible to address that market with software. Now it is because (pick one):
    • We’ve built an improbable team that spans geeks and industry insiders.
    • New hardware/networks have just appeared which makes this possible.
    • New attitudes enables new workflows (e.g. ubiquity of Facebook even among traditional technophobes).
    • This industry is commoditized so giving a player the slightest edge is a big deal.
    • This industry is just now starting to show tangible signs of embracing technology.
    • We have three lead customers signed up as alpha testers; if we make them successful the case studies will be all the evangelism we’ll need.

ERROR: No significant route to customers

Ask a technical founder about his startup, and he’ll proudly describe his stunning software—simple, compelling, useful, fun. Then he’ll describe his cutting-edge platform—cloud-based, scalable, distributed version control, continuous integration, one-click-deploy. Maybe you’ll even get a wobbly demo.

“Great,” I always exclaim, sharing the thrill of modern software development, “so how will people find out about this brilliant product?”

Cue silence… Then a smile breaks across the founder’s face:

• “We’re going to A/B-test AdWords campaigns until we discover our hook.”
• “We’re going to A/B-test our landing pages until the right message appears.”
• “We’re better than everyone else at SEO.”
• “A friend of mine knows how to get popular on Twitter.”
• “We’re going to get reviews on blogs.”
• “We’re going to start with our own network and grow it from there.”
• “We’re going to use an affiliate program so our customers sell it for us.”