The lesson of the story is, with the exception of life science companies... try to bootstrap your way to prototype or customer traction.

The reason this company failed is because they spent too much time on their investor pitch and forgot what is really important... getting involved with customers and reaching into the toy industry to build effective partnerships to gain market traction. I see many Entrepreneurs get trapped into the write a business plan and raise money to start a business mentality which increases the probability of failure. I also noticed the team was too afraid to share their idea with others which limited the opportunities to form effective partnerships to execute without investor money. You have to realize that ideas are a dime a dozen, they're not worth anything unless people behind the idea work overtime to turn it into a reality.

Hi Frank, hope you are well.

Not sure if you caught any of the ramblings about the research referred to in this:

http://www.theequitykicker.com/2008/05/14/are-serial-entrepreneurs-any-better-than-first-time-entrepreneurs/
Interesting comments and questions.

Frank, as someone who needs to learn about getting funded, I am sincerely asking you, how does someone with no validation from their market get funded like these two did? (Frank: they never got funded.) How did these poor souls get so much bad advice that they are still following? In all the years they have been at it, somebody must have tried to get through to them.

How Did They Get Any Funding? The Validation They Used Did Not Even Come From Their Market.

The people selling video games are looking for ways to get children to play video games at an earlier age so therefore you will succeed? The people selling video games are not your customers! They are not the ones buying your product. That is neither here nor there. Now if your customers said that they were looking for a way to get their children to play video games at an earlier age, it might mean something, depending on your product.

I don't know who looks worse in this interview, the Angels, the Entrepreneurs, or Tritech which they said is supposed to help those who show high growth potential. They even gave their counselor's name... ouch!

When asked what was the strong point of their counselor Mark Monaghan, their answer was that Mark has an innate ability to make you step outside the box. Perhaps that was the problem as that is not what these women needed. Using validation from outside your market is definitely outside the box.

I don't know if they were already outside the box before they met their counselor. But we know he didn't bring them back down to earth.

I have a hard time finding any value in this interview. The market was never discussed. There was no mention as to how children (toddlers) are better or worse off for having or not having the product.

First it was video games but then they started talking as if they were tackling all the educational woes of the nation. But their product is only up to the age of five. Are they telling me that kindergartners are failing across the nation?

They keep saying that nobody is doing what they are doing and that nobody is focusing on the core problem which is really understanding how children learn. My wife currently teaches high school and before that she ran a daycare center that my mother started.

In both cases she takes required continuing education classes at the university which are all about how children learn. It is to the point where one has to be certified in the specific age they teach, including kindergarten. But these women tell us there is nothing out there but a bunch of mixed messages on how children learn.

They also say that nobody tells you how to be an entrepreneur. Of course Tom O'Malia who has also been interviewed on this show would disagree.

Frank said that the benefit of being a serial entrepreneur is that next time you will be faster on your learning curve. But I don't hear from this interview that these women have learned how disconnected they are. They still think it is great and that everyone needs it without offering a single example. They say that it is just a matter of timing. They insist that they have not failed and that it can still happen.

Frank admitted that he failed. But these women have their delusion and they are sticking to it.

They don't say how their lives would be better if they had this when they were five years old. If your business is dependent on timing it is not worthy of venture funding unless there is an economic bubble for it, so that you can sell it off before the bubble bursts, so that you don't get stuck with it.

I went to their website for more info but found none. If one clicks on "about" the first thing you read, what is at the top of the list for them, is the type of work environment they provide in their company. No mention of the value they provide.

Another important item on their list was "we support philanthropic efforts". That would really upset me if I was the early stage investor. It's not just the money. They can't live up to it. So it ends up being bad public relations. It also shows a lack of focus in the proper area.

I looked for what they do better for their customers than what others do and there is absolutely nothing there. They claim to provide enrichment and learning but don't claim how they do it better. They come across as just another fish in the sea.

In the interview they said the industry was going in that direction because of the integration of electronics into toys and because the toy companies were looking for ways to get children to play video games sooner. Those are entirely different markets and have nothing to do with the market of educational toys they were chasing.

So here you have people who were using different markets to validate the market for their product rather than using their own market for validation. The market for educational toys is a small fragment of the toy market, maybe the smallest. The market for the Barbie Doll is also a fragment of the toy market, but probably bigger than the educational toy fragment.

You don't get to say that because the toy market as a whole is "x" size that you have a big market. You have to know what fragment you are in and what determines success in your fragment.

I just fired a very hard worker, a dear and close friend of mine, and someone that I use to work for. He kept over performing and it was screwing up my cash-flow. I couldn't make him understand that you don't get to say that your work is better, more productive, or more efficient unless it makes the cash-flow better, faster, greater, or more efficient.

From my experience, I see that the problem unsuccessful business people have is that they don't understand that the saying "Cash is King" is full of compassion and brotherly love. It is just another way of saying the customer is always right.

The cash belongs to the customer. At every moment your focus must be on what your customer wants from you in order to give you his cash. By performing to the cash you are performing to the demands of your fellow man. It is not evil.

The people inside the company never get to say if their work is good or not, only the paying customer gets that authority. If I tell my worker "thanks for the good job", I am just passing the message from the customer to the worker, but I don't get to make that judgment call. My opinion about what a customer should want means nothing. It is my responsibility to let the paying customers shape my opinion.

Too many people have bought into the idea that money in itself is evil. So they don't realize that when they are talking about money and cash-flow they are talking about people. They prefer not to talk about money and instead focus on abstract theories of efficiency, productivity, or something else that is supposed to indicate they are doing the right thing. They want their work to be judged by some inspection sheet or job description, but not judged by the smile on their customer's faces, and not judged by the cash-flow.

In the interview we hear the women of Budding Brilliance talk about all the positive support and feedback for their idea. But it was all from nonpaying customers. The idea was being judged in isolation and never equated to the existing cash-flow of their market fragment.

How much cash-flow is going into other educational toys for five year olds right now? And what does it take to redirect the existing cash-flow to your toy? If they don't know the answers to those two questions than they don't know what they should be working on. Without being able to answer that, they can't claim they are working on something good and they can't claim they should be funded.

People do not have unlimited amounts of money. You have to be able to name the products they are not going to buy so that they will be able to buy your product and why are they going to do that.

Some Angels say to start with the team, and some say to start with the idea. They are both wrong. In this case neither the idea nor the team was the overriding problem. It was the tiny market.

The correct thing to start with is the market size. Jim Armstrong tells us to take a lot of time to identify the market. Randy Lunn tells us that by the time you know what questions to ask it is too late to invest.

A large market is more forgiving of your mistakes. When you make mistakes with some customers you still have others. The smaller the market the less you have to fall back on. So not only do you need to know that you have identified the market for your product correctly, it must be large enough to increase your chance of success. Market size is not just about increased profits. It is also about room for mistakes.

Some Angels say that they don't care about the market size or the product and what they look for is a good team. The market determines if a team is good or not. A team that is good in the widget market is not the team that is good in the gizmo market.

By choosing based on the team you regulate yourself to the size market that the team is good in. To paraphrase Randy's advice, by the time you know what questions to ask to make a good team, it is too late to invest. If you know the questions it means you are choosing a smaller market with more competition.

The smaller the market the more perfect your team must be because there is less room for error. The larger the market the less perfect your team has to be in order to bring you a payday.

A more perfect team in a small market has a higher chance of failing than a less perfect team in a larger more forgiving market. If you want the least amount of risk you will go after the largest market you can find.

Does Anyone Else Besides Me Feel Sorry For These Women?

The four reasons they gave in this interview for doing their project are actually supposed to be four reasons not to do it. Yet one of them quit her job and stopped working on her MBA to do the project. If they were friends of mine I would have been in their faces everyday trying to stop them from hurting themselves.

1. They identified an increasing trend of electronics being incorporated into toys. That doesn't mean electrical toys are a hot area. It means that competition is so difficult that manufacturers are having to add more features in order to sell their toys. People only spend so much on a toy. This trend means that the cost to the manufacturer is going up and his profits are going down. Not a reason to quit your job or drop out of school.

2. The people selling video games are looking for ways to get children started playing video games at an earlier age. That has nothing to do with why parents will buy your product. If anything it means that people are trying to come up with ways to get parents to spend their finite amount of money on their product instead of yours.

3. They said that "parents have no way of knowing" how well there child is learning, and that "there is a lot of misinformation out there". First of all, telling your customer s/he doesn't know what s/he is doing is not a very good sales pitch. This is especially sensitive among parents. Everyone knows a parent can only do the best they can with what ever limited time and money they have. Talking like that just rubs it in, that they are not rich. Secondly the fact that there is a lot of misinformation means that your advertising costs are always going to be high and the length of time it takes to make a sale is always going to be long. Other manufacturers are always going to be putting out their own information to get people to buy their product instead of yours. Different people are always going to have different opinions on how to raise children, especially when it comes to things that affect the family budget.

4. They said that "no one else is doing it". There is a reason no one else is doing it, probably more than one. The fact that no one else is doing it proves nothing.

Turning Down $500,000

Everyone I know who puts $500k into something knows what he is doing. I suspect that the man who offered them $500k also said I want you to do a, b, c, x, y, z, with my money, because he has some understanding of business.

Their response was that "he didn't get it" and turned down the money. We only have their word for that. Maybe he got more than they realized.

This Interview Sounds Like A Good Example Of A Lot Of The Poisonous Advice That Exists In The Venture Community.

To keep their hope alive, these women were quoting Guy Kawasaki's book The Art of the Start; "if you do good you will make money". They made reading his book look like playing with a loaded gun. The missing part to that advice is that you do not get to decide what "good" is. Only the paying customer gets to do that.

So many Angels and VCs teach people that they have to have passion. Some say they don't care about the idea, and they don't care about the market, and they don't care about the business plan, and that passion is the number one thing.

Well these women definitely have a lot of passion so why didn't they succeed? Because passion is a polite way of saying that you are stubborn.

The only thing to be passionate about is the exact same thing your customer is passionate about. You do not get to choose your passion.

Your customer has "x" amount of time and "y" amount of money, which dictate his passion. If you are not delivering within your customer's budget and time frame, your passion is not in line with the passion of your customer.

This Interview Gives Me A Low Opinion Of TriTech.

One thing you have to remember about a program like TriTech is that they have to show they are helping "x" numbers of people or the program will be shutdown. So it is not in their interest to tell you not to use their services.

I think the folks at TriTech should have been able to point out the same flaws that I pointed out from the interview. They should have been able to point out that the women have not yet shown that this is a venture capital worthy opportunity. It would have done them and their families a lot of good to do so.

Educational toy manufacturer Leapfrog was mentioned in this interview as someone who should take over where these women left off, and bring this concept/product to market.

According to Hoovers the average annual revenue of a small educational toy manufacturer is only $220k per worker. That's before expenses.

Leapfrog is doing more than twice as good as the national average. They are not likely to think they need outside advice. They are not going to want to mess up what they are doing.

I did not hear anything in the interview that showed an understanding of Leapfrog's business and how this concept/product fits into their machine. Leapfrog is a small company with shareholders to answer to.

What passes for a tiny mistake in a large company is an enormous mistake in a small company. In a small company any little misstep makes people look bad for a long time to come. I did not hear that any of Leapfrog's concerns were being addressed.

It doesn't just affect the shareholders. Even the janitor won't be getting his Christmas bonus because of just one wrong decision made at the top of a small company.

You can't go to a company to sell them your invention and act like you are not asking them to put themselves, their coworkers, their friends, and their families on the line, because that's exactly what you are asking them to do.

Tiny Market.

At $442.3 Million Leapfrog is doing better than twice the national average per employee for a small company selling educational toys. Their website says they have a portfolio of 272 products. That's less than $900k per product before expenses and they are doing more than double the national average per product. So other companies are making about $400k per year per product before expenses.

These women said they have one product. They said they need $700k just for the research. So they were going to be into this for more than a million dollars before they had something that might make $400k per year before expenses.

It would take the entire life of the patent, assuming it remains viable for its entire life, just to pay off the seed money. A single educational toy is not a venture capital worthy investment.

It is scary to know that these women still believe in this fantasy and they say they are helping other people with their ideas. There was never anything to justify quitting a job or stopping work on an MBA. I only researched it for five minutes and I saw that. Yet they say they had research to show this was the way things were going.

My research shows that even if you perform to the national average it is still not good enough. That probably explains why Leapfrog doesn't want it.

TriTech

According to the interview, Tritech is supposed to focus on high growth opportunities, therefore it cannot justify advising these women. Why didn't Tritech tell them that the average educational toy only makes $400k per year before expenses?

I suspect Tritech doesn't want to know the real market size because it needs a large client list to justify its existence. These poor women are holding on to Guy Kawasaki's book as if it is the word of god. Guy Kawasaki said that if you do good you will make money, we are doing good because we are trying to help children, therefore we will make money.

$400k before expenses, and don't forget to pay back the investors, that's all you get. I guess Guy Kawasaki left out that part.

As far as I know, there has never been an economic bubble for educational toys. Or am I missing something?

Frank,

Do you realize the mistakes that I am pointing out are monumental and that they are not mentioned in the interview? Because they are not mentioned, I do not understand what you expect us to learn from an opportunity that only had a $400k market size but needs over a $Million to get started. The market size was never mentioned. I had to figure that out on my own.

In the interview you said "sounds like a mature decision" in reference to the $500k investment that was turned down. We don't know that it "sounds" like that from what was said. For all we know, the money would have come with some strings that would have guided them in the right direction.