Roadmap to Startup Investment

Posted: September 15, 2013 by Avi Ram in Leadership, Legal, Marketing, Operations, Planning, Startup

aviramROADMAP TO START-UP EQUITY INVESTMENT

There is more investment capital available for start-ups then there are fundable start-ups to invest in. The key word is “fundable.” In this case the word fundable means that there is a 50+% chance that the start-up business will meet their business plan milestones.

 THE ROADBLOCKS

Today’s Sophisticated Investors Don’t Invest In:

  • Ideas
  • Technology
  • Business Plans
  • Hype
  • New paradigms

Today’s sophisticated investors do invest in a solution to a well-defined business problem that will generate revenue when executed by a highly motivated team of entrepreneurs possessing an “unfair advantage”.

THE ROADMAP

In order to get any sophisticated investor to seriously consider funding a new business, the following seven questions need to be answered and summarized before they will even read your business plan, never mind even meeting with you.

  1. What problem does the business solve?
  2. What is your “unfair advantage” that enables you to solve the problem better than anyone else?
  3. What is the competitive landscape of your industry and market?
  4. How do you position your business to reach and penetrate your market space?
  5. What qualifications and motivations of your management team will drive your business to success?
  6. What do you need to make this business succeed?
  7. What stage of development of the company are you in?

What is the problem the business is going to solve?

If there is no problem, there can be no business.

Business buyers primarily spend money in two categories:

  • Those that directly help them produce whatever it is they sell (derived demand).
  • Those that help them to solve some business problem, need or dissatisfaction with their current state of affairs.

Remember that it is no good if you as the expert can see the need, but your prospect cannot. If they can’t see it, you can’t sell it.

The “Unfair Advantage”

Since a successful business addresses the needs of their customer base, they must have an “unfair advantage” to win the deal over everyone else. Some of these “unfair advantages can be:

  • Technology
  • Cost
  • Process
  • Manufacturing
  • People
  • Customer Service
  • Timing

 What does the industry and market where you compete look like?

Before you can position your product or service to serve your potential customer base, you must  understand both the industry in which you are competing and the market that you are going to serve.

Markets and industries are not the same things. Markets consist of buyers  — not products. An industry consists of sellers, your competitors.

 What are the qualifications and motivations of the management team?

Ultimately investors back the team delivers the business plan. Investors should have a thorough understanding of the team’s motivations for going into this business.  If there are gaps in the management team that these should be addressed with plans for the next round of hires. Sophisticated investors can assist in finding great people through their network to help build teams.

What is needed to make the business a success?

In this context we define success as getting the company to cash self-sufficiency.  With cash self-sufficiency, you don’t need any more investment to continue development.  Provide a brief description of the things that need to be done, a rough idea of how much it will cost and an estimate for how long it will take. The answer should be something like “it will take X months to get to cash self sufficiency and these are the critical milestones we must hit on the way”.

 How far has the company developed?

This needs to be a few words that briefly describe where the project is today. It should cover such information as:

  • Legal status of the business
  • How much capital invested  to date (Do not include “sweat equity”)
  • Current equity distribution among founders and existing investors
  • Demonstrated proof of concept
  • Customer commitments
  • Status of IP – patents, copyright or trademarks
  • Names of other prospective investors

If you answer these seven questions completely, you will move ahead of pack in the race to become a fundable company.

Read the full article and other entrepreneurial thought leaders’ articles at www.cincyentre.com.

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Comments
  1. Paul Spitz says:

    Interesting point of view, but it doesn’t seem to fit what I see in the Bay Area. There are plenty of start ups getting funding even when there is no business problem being solved, no plan for generating revenue, and the founders lack experience or any kind of track record. Twitter and Instagram leap to mind, but there are many others. I’ve also read comments from VC’s recently that they don’t invest in companies or ideas, they invest in people. They gave the example of companies they had funded where the initial idea/product didn’t pan out, but the VC didn’t pull the funding. They just hung in there while the founders tried to come up with something else. Are these examples outliers, and we just hear about them because they are splashy?

    Personally, I like your criteria a lot. If I had money to invest, I would prefer your approach. Out here, the track record for VC investing is pretty mediocre. Most fail or barely make any money, while a handful of grand slam investments pay for everything else.

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