Need Funding? Answer These 3 Questions First - Who Needs It? Will They Pay for It? How Much Will They Pay?
Three Seemingly Simple Questions That Every Company Needs to Answer Definitively… (and many surprisingly cannot)
Finding great investors to fund your company can be a challenge. Businesses can be complex. However, if you want to really capture the attention of potential investors - be LASER focused on answering three vital questions. Who needs your product? Will they pay for it? How much will they pay?
The trick is that this is not always as easy as it sounds. However, it is worth the exercise to be able to clearly articulate this. Having definitive answers to these three questions will set you apart from the competition for investment capital. In an environment in which capital is tight - like this environment - having strong answers to these three questions can be the difference between success or failure at attracting investors.
I fully realize that this can sound ridiculously obvious. However, my experience has shown that it is not necessarily the case. Many companies simply do not have great answers to these questions. This can be particularly true with companies that involve complexity. When I speak of complexity, I refer to companies that have a product or service that involves science, engineering, deep technology, and healthcare. While this phenomenon is not limited to these three sectors, I do find it most prevalent here.
Why is that? Well, there is actually a fairly straightforward answer.
A Product in Search of a Market
Many companies that have science, engineering, deep technology, or healthcare at their core offering, are often founded and run by scientists or engineers. These companies were often started by an individual that had some form of insight, invention, or project that resulted in a product or service that made ‘something’ easier or cheaper. In other words, the founder ‘built a better mousetrap.’
In many cases, the invention or product came first, thoughts about the market into which it could be sold often came (a distant) second. Therefore, in many cases, the company is actually a product or solution in search of a market. This happens time and time (and time) again.
Often, the Founder/CEO is amazingly smart, and an expert in their domain. However, their relative expertise and experience in business model strategy and investor engagement is not as strong. Therefore, even though the company has a strong product or service, the business struggles, and finding engaged investors is challenging.
I realize that I am generalizing here,. But - in general - this is not an uncommon challenge.
VC Changed Everything (well, maybe not everything, but certainly a lot of things…)
For most of human civilization, companies were grown organically - and rather slowly. Someone had a challenge. They created a product or service to solve that challenge. Potential customers slowly became aware of the solution. Company revenues grew as the loyal customer base grew. In most cases, it could take years or even decades for a company to realistically be in a position to scale.
However, that is not necessarily the way companies are being created and grown today.
In the current model, an idea for a product or service is created, the founder gets to work putting together a great pitch deck, and goes out to secure venture (or other) capital to fund rapid growth. There is nothing inherently wrong with this model. When it works, it works phenomenally. In fact, the model has worked so well, that the investing industry continues to clamor to put capital to work in the space.
You can’t argue with success - and the model has been enormously successful.
The Age Old Problem of the Chicken and the Egg.
However, as successful as this model has become, it has created some interesting challenges….
The crux of the challenge is that in using this new model, many companies are being created without taking the proper time and effort to talk to potential customers. That is where it gets tricky, and where so many companies fall into the trap. It is the classic chicken and egg scenario. We can’t talk to customers unless we get the funding to hire people to do so. We can’t secure the funding unless we have traction with the customers. A conundrum indeed.
I would argue that while the model of funding companies may have evolved, the ‘physics’ of growing a sustainable company have not. It is still ALL about the customers. WHO needs the product? Will they PAY for the product? HOW MUCH will they pay? Get those answers correct, and the company tends to do well. Finding investors runs smoothly. Misstep on any one of those three questions, and it can spell trouble.
Interestingly, part of the problem could be in the common perception of the Venture Capital industry. If asked, many first time Founders or CEOs would say that they perceive VCs as the experts to go to when a new idea or product is created, and a market needs to be discovered. For sure, there is some truth to that.
However, the reality is a little bit different. If you were to sit down and talk to a VC, they would tell you that what they REALLY want is to fund an idea that already has a fairly established product/market fit. One in which the company has thoughtfully created their client profile, has created a product with that person in mind, and has a pricing model that fits into what the client is willing to pay.
Once again, the focus is on successfully identifying a customer’s needs and their willingness to pay (and how much). The ‘superior nature’ of the product or service is actually a secondary aspect.
A Better Product Does not Necessarily Mean a Good Business (and Good Businesses are What Gets Funded)
While this statement is true of any business, it is particularly crucial when it comes to a product or service that has a fair degree of complexity - science, engineering, deep technology, and healthcare. There are an abundance of breakthroughs, inventions, innovations, and improvements in those areas. An abundance of great ideas.
Sadly, however, a breakthrough product or service does not guarantee a great business opportunity. A great business is born when the customer understands the benefits of the product and - most importantly - is willing to pay for those benefits. Ideally, the product solves an immediate and urgent need that the customer is willing to pay for - now.
When a product or service does not closely match this criteria - the company runs into challenges. That happens regardless of how innovative the product or service is.
Customers WILL Change Their Behavior - But ONLY if they Agree that the Benefits Outweigh the Costs
When making decisions on products or services, we instinctively weigh the costs and benefits. It is a process that we all go through whether we are conscious of it or not. We look at the product, figure out if it solves a problem that we have, figure out if the problem is big enough to warrant a change of behavior, figure out if the benefits that we receive from changing behavior are worth the price we will need to pay for the product. If the answer is ‘yes’ - we buy. If the answer is ‘no’ or ‘maybe’ - we don’t.
That’s it - and we ALL do it.
The challenge is that introducing any new product or service into the marketplace will require customers to change their behavior in some way. EVERY product. And changing people’s behavior is NOT easy. Most people will not change their behavior unless they have a very compelling reason to do so.
Is your new product or service compelling enough to make that happen?? Who needs it? Will they pay for it? How much will they pay?
Not answering these three extremely important question is the death knell for countless companies. If you cannot answer these three questions with a high degree of specificity - getting funding for your company could prove to be quite challenging.
One of the MOST Common Issues we See
As I mentioned, this is one of the most common shortfalls that we see as companies work to engage investors. The idea is strong, the team has the correct expertise. However, there appears to be a disconnect when it comes to customer engagement. Remember, great ideas get you a meeting. However, a great idea connected to a great business gets funding.
This problem is so common that at Bennu Partners we created a Workshop to help companies correct the problem. We call the workshop ‘Walkers Loop’. Click through the button below which will take you to our Workshop page.
If you are a Founder or CEO, and have a complex product or service, chances are that you are struggling with this aspect of your story. Do you get the feeling that you are struggling to tell this side of the story to investors? Do you get the sense that investors just don’t ‘buy’ the product/market fit story that you are telling? Are you afraid that perhaps the product/market fit is not defined enough?
Competition for investment capital is always intense. In tight funding markets like today, even more so. You can set yourself apart from the competition with a strong message on customer traction.
Are you tired of fumbling in the dark by yourself on this issue? If so, go to our site. Perhaps we can help you on the journey.
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