Throughout my career, I have been able to help several businesses find funding. I could write volumes on the topic of how to fund an early-stage business and what it takes to be fundable. The path to funding depends greatly on the industry, the entrepreneur/inventor, the amount of capital needed, what if any governmental regulations may be involved in process, etc. The truth is that there is no exact formula, but more of a weighted average equation measuring 5 key components. Which components are the most important depends upon the investor and what if any strategic elements they can add to the business.
Whether you are seeking a few hundred thousand dollars or several million dollars, the basic components of fundability are as follows: 1) Entrepreneur Credibility 2) Unique Concept or Technology 3) Scalable Business Model 4) Competition 5) Realistic Valuation and Expectations.
Entrepreneur Credibility: Client should have a track record of success, credible expertise in their field, ability to present/articulate their business model.
Unique Concept or Technology: A unique product that is first to market, patented or patentable technology adds to the likelihood of success.
Scalable Business Model: The business concept or product must be scalable to a level that will generate adequate returns for investor. Depending of the investor, this could range from 10s of millions to 100s of millions of dollars.
Competition: Mature markets can be a plus as other entrants have defined the path to success. Heavy or well-funded competition is a negative. The competitive landscape effects likelihood of success and is typically weighted heavily by investors.
Realistic Valuation and Expectations: Valuation should be supported by financial expectations/projections and stage of development. Expectations of Investors rights and control also have to be aligned to attract investment. An investor will value your business based upon the mix of all five of the above components.
Many early stage companies with a great business concept or innovative technology never achieve funding (and die) because they fail to achieve“critical mass”. “Critical mass” as it relates to fundability, is hitting the exact balance of the above factors, which achieves an investment “reaction”. Entrepreneur’s often use the cash available to their business from their savings, and friends /family (which they know is not sufficient to launch their business) to build prototypes, where they might have been better off paying an attorney to protect their product design. A complete patent has more value than an incomplete prototype. I will cover some of these common pitfalls in part II of this series “Use the Money that You Have, to Raise the Money that You Need”.