What is the biggest challenge facing an entrepreneur? There’s coming up with a great idea, which can be hard. There’s finding funding, which is definitely a challenge. There’s getting your idea to work, and we’ve been arguing here for quite a while that execution is critical. But I think that the biggest challenge is actually building your network – and it’s one that people give almost no thought to at all.

On the last day of the Australian Association of Angel Investors National Conference yesterday, we started the day hearing elevator pitches from three start-ups. It was pretty interesting to listen to them, and there were some common themes. All three firms had what sounded like great technology. The ideas were clever, they appear to meet market needs, and all of them are far enough along that they’ve successfully executed the ideas. All of them need more money now to get to the point where they’ll cash in, but I think that to actually get to that point, they need better ideas about developing their networks.

There are two key parts to this. The skills you need to execute an information-based business model are aggregating, filtering and connecting. Building the entrepreneurial network is all about connecting – and also getting people to unconnect.

The first key part is linking into the value network which surrounds and supports your innovation. Entrepreneurs often focus too much internall, on their own ideas, and don’t think as much about this, but it’s a critical issue. Which parts of the economy support your idea? What is your relationship to them? Finding financing is part of this, and so is finding suppliers and distributors.

In large firms, these links usually already exist. That is the easy part for them. The hard part is getting their own internal systems to change – this often means they have to break some of the existing links in their system which is hard. Entrepreneurs have the opposite problem – they have no existing links at all. They have to build their own, and in doing this, they often have to get people to choose them over their current collaborators. In many cases, entrepreneurs are trying to build links to existing companies as part of their exit strategy. When I was working for a software start-up ten years ago, everyone’s exit strategy was to sell out to Microsoft. The conversation at the AAAI Conference shows that the strategy now is exactly the same, except that we’re all trying to sell to Google instead.

In either case, your position within the value network will determine whether or not this can happen. Alan Noble from Google said yesterday that in many cases they are waiting for software start-ups to demonstrate these links before they’ll consider buying the firm.

The second part of building the network is connecting with customers. With the large firms, it means that they either have to get current customers to stop using whatever they’re buying from you now and switching to the new innovation. Many firms resist this, because they don’t want to cannablise existing markets. The other option is to find new customers for the new idea. The problem here is that the new customers often require a completely new value proposition – and existing firms find it diffiult to create these.

Again, entrepreneurs face the opposite problem. They don’t have to worry about cannabilisation – in fact, they want to cannabilise existing markets! Their problem is that they don’t have any customer connections at all. And in many cases (as in all three firms presenting at the conference), the assumption is that superior technology will automatically win. We know this isn’t true, even when the technology is demonstrably superior along all technical dimensions (see the story of the 56k modem, for example).

The example yesterday came from a firm with a bunch of bioremediation technologies. One of them sequesters hazardous waste, and it apparently does it more cheaply and more effectively than the current technology. The potential market is very big, and they are in negotiations with a couple of major firms to buy the product. The problem for them is that everyone knows that the current technology works. Why take a chance on something new, especially if there are major downside risks if the new technology doesn’t work as advertised? How can you demonstrate that your new technology will work when it hasn’t been used in this exact application or on this scale before? It’s a big problem.

To break these existing bonds, you not only have to be better, you have to get people comfortable enough with your innovation that they are willing to abandon what they’re currently using – you have to get them to unconnect from something else before they’ll connect with you.

I think that entrepreneurs would benefit greatly from thinking about building a network. To me, the most interesting questions for these start-ups are: how will you link in to the value network? and who is your competition and how will you get people to unconnect from them? If I were investing my own money, I’d want good answers to both of these questions before I signed a cheque.

(Picture from flickr/Eole under a Creative Commons License)