I’ve worked with dozens of early stage startups, many of which were pre-funding and trying to position themselves for a seed round. As a result, I have seen a lot of things done right as well as a lot of half baked ideas.
One of the most common mistakes that startup founders make is failing to recognize when their business model needs an early stage investor and when it just needs hard work and its first paying client. The distinction is: some companies need a boost to get off the platform, others are better off growing one brick at a time.
Now of course I am simplifying the issue somewhat. It can in fact be difficult to tell whether you should be looking for investors or looking for clients. So let’s break it down into key factors. Ask yourselves these questions and you should have a pretty clear idea whether or not your business or idea is ‘investable’.
Will it scale?
Let’s start with the trickiest question. “Of course my business will scale! Do you think I’m starting a pawn shop?” The term ‘scale’ can obfuscate what we’re trying to establish here, because taken at face value, scale just means ‘to grow’. What we really mean is: can the product or service be provided to increasing numbers of consumers without significantly growing the operation itself?
Why do technology companies get so much external funding? Because technology is really good at scaling. Once you have the product figured out, all you have to do is acquire more users and more servers to support the traffic (roughly speaking). By contrast, if you want to scale a construction company, you have to invest in every inch of growth — vehicles, personnel, tools, etc.
So, will your company scale? Ask yourself this question: will the company make more profit from its 100th client than it does from its first? An investor wants to invest in a company that can scale because this is where they will see the largest returns.
Is it ‘shovel ready’?
If the idea has passed the first test, now you have to consider how an investor will view your idea. Importantly, investors will want to see that your company is more than just an idea. The term ‘shovel ready’ refers to projects that are ready to kick off tomorrow if everyone gets on board to do it — the planning is done, the technology is ready, the team is in place.
Your idea is not investable if it is limited to a power point and your own enthusiasm. Here are a few things you must have accomplished before seeking an outside investment:
- Beta tech development (if your idea involves tech)
- Market research
- Prospective client outreach
- Purchase orders (if applicable)
- Complete business plan
- Clear investment terms (This much for this percent)
What is the USP?
You have a light bulb idea in the shower: what if I sold books online?! Great idea; Amazon already did it. For your idea to be investable, you need to clearly outline your unique selling point. Emphasis on unique.
This does NOT mean you have to have an idea where there would be no competitors. In fact, investors would likely be suspicious if you claimed you would face zero competition. Instead, investors want to see you acknowledge who your competition is and clearly describe how the product or service your company would offer could win market share.
In order to demonstrate USP, you must triangulate your company within its field and delineate how its value proposition differs from everyone else (in terms of quality or variety).
After you have asked these questions, you should have a clearer picture of whether you are starting a business that merits an investment, or if you should grow this through more traditional means. It is important to remember: not every great company needs outside capital!