The entrepreneur's path from concept to investment
My friend Jeremy is passionate about what he does. He's in the field of psychology, and has developed a process that can clearly help those in need find their way. Jeremy's passion for his work has evolved beyond his personal practice. He wants his process to be available on a wide scale, helping as many people as possible.
Passion is an essential element underlying successful growth in business. Jeremy, like many entrepreneurs, wants his business to grow — and grow rapidly. He's convinced that to translate his passion and process into widespread success requires outside investment capital. At some point, that may be true. Just not yet.
Jeremy's business is in its early stages. By his own admittance, he hasn't documented the results patients attain. He has lots of anecdotal stories, just no proven and documented track record yet. What's missing is customers' validation.
Customers provide validation by paying money. Paying for a product assigns value to the product. Getting a lot of people to pay for a product validates the value the product delivers. The product solves a problem and people are willing to pay to have that problem solved.
The expectation of investors at this early stage is that Jeremy (or any entrepreneur) will fund their business through generated revenue, their own financial resources, and friends and family. The transition from self-funding to other people's invested money is usually a function of proven capability matched with opportunity.
The common vernacular at this stage is “We're ready to take the business to the next level.” Hundreds of market-validated products and services could truly blossom into growing businesses if there were sufficient capital to fund the growth. If you're in this category, recognize that capital is a tool and consider the investor's perspective.
The investor is the buyer, and the entrepreneur is the seller. As such, the entrepreneur needs to present a compelling case.
That requires the following:
• Be clear on the requirements;
• Know what the money will be used for; and
• More importantly, know how the money will make the business more successful.
Investors, banks, angel investors or other sources of capital are, in 98 percent of the cases, not looking to fund an entrepreneur. They're funding a venture that's mobilized and driven by a capable entrepreneur. The purpose of funding a viable and growing venture is to receive a premium return on the investment. The entrepreneur who wants to get to the next level, and believes capital is the key to doing that, needs to prove his or her case. The entrepreneur needs to show investors how his or her money will drive a premium return.
And when you do prove your case, realize that investing in early-stage businesses presents a high risk. If you assume that a “no risk” CD returns 3 percent, and a moderate-risk money market fund 6 percent, then a high-risk entrepreneurial investment should return at least double-digit percentage gains per year. And, the investor needs an exit strategy. That's the case the entrepreneur must prove.
Proper capitalization can drive growth. The entrepreneur's task is to prove the growth of the business is attainable, sustainable and profitable. If that can be done, then there are sources of capital that will help that business “get to the next level.”
One disclaimer: disruption
Disruption occurs when the introduction of a new product revolutionizes how things are done. In this case, the rules change. The owner of a disruptive product or process becomes the buyer, and the sources of capital are the sellers. It's simple supply and demand. Disruption is unique and demand for it will be high. The entrepreneur who is in this position should pick his or her partners wisely.
Ken Cook is co-founder of How to Who and co-author of How to WHO: Selling Personified, a book and program on building business through relationships. Learn more at www.howtowho.com.
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