My friend Jeremy is passionate about what he does. He is in the field of psychology, and he 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 […]
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My friend Jeremy is passionate about what he does. He is in the field of psychology, and he 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 to grow and grow rapidly. He is 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 has not documented the results patients attain; he has lots of anecdotal stories, just no proven and documented track record yet. What's missing is validation by customers.
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/or 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 was sufficient capital to fund the growth. If you are 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. Be clear on the requirements. Know what the money will be used for, and more importantly, how the money will make the business more successful.
Investors, banks, angels or other sources of capital are, in 98 percent of the cases, not looking to fund an entrepreneur. They are funding a venture that is 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 their case. The entrepreneur needs to show the investor how their money will drive a premium return.
And when you do prove your case, realize that investing in early stage businesses is high risk. If you assume that a “no risk” CD returns 3 percent, and a moderate risk Money Market Fund returns 6 percent, then a high-risk entrepreneurial investment should return at least double-digit percentages per year. And, there needs to be an exit strategy for the investor. That's the case the entrepreneur needs to prove.
Proper capitalization can drive growth. The entrepreneur's task is to prove that 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. When disruption occurs 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. Demand for it will be high. The entrepreneur in this position should pick their partners wisely.
Ken Cook is the 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.