Credibility comes from being real.

How does an entrepreneur establish credibility?

Smart, savvy investors know that your product as currently configured or even presented will not be the product you finally grow your business around. It just doesn’t happen. From Google to Microsoft to Yahoo! to dozens of lesser known companies, the first product is always changed. Very often, the first product is a failure. It’s the second or third products where the revenue is really created.

Examples of this are pretty much endless. I attended a seminar at Amherst College, given by professors from Harvard and Amherst. It was given to a group of specially selected entrepreneurs, lawyers who work for entrepreneurs, and business professors from all across the United States. The main thing that the entire group agreed on was that the one thing that always changed in the growth of the business was the product.

Now let’s get to the point. Smart investors invest in you as an individual, or even better, in your team. They’re not so much interested in how successful you think the first product is because if they’re smart, savvy investors, they know you’re probably wrong. However, what they want to know is how will you know when you’re wrong? What will be the milestone at which you now know that product won’t make it and then you start working on the next product. How will you determine what the next product will be? Will it be based on focus groups, customer discussions, your own creativity, or whatever?

If your whole company is based on the success of your product, a) you’re doomed to failure, and b) you’ll never raise smart money. You may get money from your wife and your cousins, but smart money won’t put money in your deal.

I’ve sat on dozens of investor panels where fledgling companies have made presentations as well as ran an venture capital firm myself. One of the smartest questions I’ve ever heard asked was the following: At what point, Mr. Startup CEO, will you know your product has failed and you’ll change course? How much of your investors’ money will be spent at that point, and how much will be left to alter your direction? Most start-up CEOs haven’t thought about that. They’re so convinced their first product will be an ultimate hit. But if they are, they’re not the right place to put smart money.

They should be educated to the point that they know first products usually fail. The issue is how will they know, when will they know, how much money will they have left, will their equity have to be devalued to raise more money, or will they be able to change in enough time to get a successful product out the door? The ability to redirect funds, modify the product, and modify the entire concept of the product are really key strengths that investors look for in a start-up team.

When I was president of a venture capital firm, people would come in the door, and the first thing they would do is put their product on my desk and start to tell me it was a billion dollar a year market, they only had to get 1%, and this product was the greatest thing that had ever been invented. The first thing I said to them was, “Put your product underneath my desk. Put it on the floor. It’s going to fail. What I want to know is, what are you going to do when it fails.”

Half of the people never understood that point. They simply became argumentative. “Oh, my product will work; my product will be a success.” They didn’t understand, if their product is a success, my question is irrelevant. But probabilities are the product isn’t which now means my question is very relevant from an investment point of view. We’re investing in a group of people or an individual who has the ability to change course when they’ve made a mistake, when the product doesn’t work exactly the way they thought it was going to work. There’s no problem if it’s a success. We’re all happy. But the likelihood of a first product being successful is always remote.

My recommendation to a start-up CEO is don’t focus on your first product so much. Focus on your ability to introduce the product, learn from your customer’s reaction, make modifications to the product and your revenue model if necessary, and continue to make those changes within the initial round of investment you are looking for.

Most savvy investors are skeptics. You’re not going to convince them that the first product is going to be an absolute success. Don’t waste your time on that. Make your point, “We believe this product is going to be a success. These are the reasons why. But this is what we’re going to do if it doesn’t match our expectations, and this is the amount of money we’ll have left over to make modifications, and these are the other options we think we have.” Options, flexibility, change—these are the keys to real product development. It’s not the look and feel of the first product.

Real credibility comes from understanding the realities of the market place. Passion is great, but never let passion trump reality. The business failure cemetery is littered with start-up teams that could not adapt.