When startups make their pitches to venture capitalists, the obvious hope is that their business models, product prototypes and sales projections will capture a funding commitment. Over the long term, however, the bigger payoff may be realized from another type of strategic investment from venture-capital firms: pattern recognition that uncovers new opportunities and broader markets for startups to tap.
On Aug. 21, four startups in the Pritzker Group Venture Fellows from Northwestern University's Kellogg School of Management and the University of Chicago's Booth School of Business competed in a pitch contest. The real stakes, however, were higher than the $50,000 prize. A wealth of ideas and feedback was provided to all four startups by the judges and Chicago-based Pritzker Group partners on everything from product improvement to expanding target markets.
These discussions were a microcosm of what goes on during a venture-capital fellowship. Thanks to seasoned venture capitalists knowledgeable about or involved in many industries and business sectors, startup teams gain a broader perspective. “Pattern recognition” of what worked or failed elsewhere can help move new startups beyond their own, often limited view of the world to a bigger universe of possibilities—while heading off problems that otherwise could sink the enterprise.
Having a robust venture fellows community is a strong positive for Chicago startups. The environment here is healthy, particularly when viewed in terms of quality—meaning companies tackling the big problems of business and society, and incorporating defensible and cutting-edge technologies. These startups are likely to make an impact even if their names are not well-known. Making this kind of impact, however, takes mentorship.
The challenge for many first-time entrepreneurs is that they often are confined by the limited purview of what they know and personally experience. Thirty-something business school student-entrepreneurs typically draw from their experiences as consumers. These entrepreneurs typically strive to improve, differentiate or disintermediate something they know personally and then sell directly to consumers.
Venture capitalists often coach companies not to sell to consumers directly but through partnerships or to businesses that serve their targeted customer. They understand that a change in the business model can reduce customer acquisition costs and build sustainable revenue streams. Based on what I've seen working with entrepreneurs at Kellogg, participation programs such as the Pritzker Group Venture Fellows changes or expands target markets about 80 percent of the time.
For example, the startup Four Kites, a supply chain optimization and technology solutions company, originally had avoided the third-party logistics provider, or 3PL, market. As a member of the Pritzker Group Ventures Fellows class of 2013, Four Kites was introduced to several 3PL companies and found out that these firms were not competition—they actually were customers.
With a deeper understanding of the nuances, market challenges and untapped opportunities, a startup can show a potential for the kind of growth and scalability that investors like to see. That, in turn, may lead to greater success in capturing funding—and, ultimately, market share.
Linda Darragh is a professor of entrepreneurial practice and executive director of the Kellogg Innovation and Entrepreneurship Initiative and the Levy Entrepreneurial Institute at Kellogg School of Management at Northwestern University.