Many founders, after preparing their business plans and making several pitches, don’t seem able to move their prospects into pulling out their cheque books to fund their projects. This happens even when the project promoters believe they are ready to take their start-up to the market. They believe they have a scalable way to sell their product or service and create sustainable streams of revenue. They think they have a credible plan to achieve competitive advantage in the market and make a return for investors. If this sounds like you, and you are still wondering why investors turn you down after pitching your business plan, you may need to return to the drawing board. Here are eight questions you should answer if you want an investor to seriously consider investing in your start-up:
1. What Is The Purpose Of The Business? A business exists to offer value, through a product and/or a service, which it provides to customers who, in return, pay for the value with cash or its equivalents. The money thus received finances the costs of running the business and leaves a profit to meet the needs of the proprietor(s) of the business.
This process requires the creation of products or services, marketing needs for acquisition, retention and expansion of customers, and financing to cash flow to build streams of revenue. In essence, value is that which is perceived by the customer, as represented by a benefit. The product or service to be introduced by the business must therefore solve a problem for the customer. Therein lies the purpose of the business.
For a start-up to excite the interest of an investor, it must answer these questions in the affirmative: What’s the purpose of the business, that is, what value will it create? Will the value satisfy a strong market demand? Can the business attract and retain the right talent, maintain customers and drive profits?
2. What Problem Is The Business Trying To Solve? There is a place for marketing and sales efforts that pitch the features and benefits of a product or service. But that cannot take the place of connecting with the challenge being faced by the customer. The business must ask: What problem will our product or service solve for the customer?
In seeking answers to this question, the business must remember the questions in the mind of the customer: What’s in it for me? Why do I need it? Why do I want it? What problem does this solve for me? What does the product or service do better or different than its competitors to solve the problem? The business must offer satisfactory answers to these questions before it can make a sale to the customer. The business must find a pain point and un-cover a market before it can make money.
3. What Is The Solution To The Problem? The business must demonstrate that it has gone through the problem solving process, having identified the problem, decided on an ideal solution and chosen a plan of action. This exercise will help the investor in evaluating the effectiveness of the proposed solution to the identified problem. It will also indicate whether the business is on track to transform the current situation into one that addresses the need of the customer and meets the objective of the business.
The basic idea is to establish the preferred reality. One way to do this is to determine a minimum viable product or service that will be needed for a launch. This must be something that customers can use, which will give the business the opportunity to test it and determine its fitness for the market. This provides a practical way of testing the waters before investing time and resources in moving forward.
4. Who Are The Competitors? A new entrant into the market must define its competitors, which means going beyond the big names in the sector and looking at every business that can potentially impact its success. The direct competitors will be those already marketing and selling products and services, similar to the one(s) being planned, to the same audience that the business is targeting. Indirect competitors will be those who address the same customer needs as the business plans to do, but do so in ways that don’t exactly match but overlap with that of the business.
Knowing and keeping direct and indirect competitors within radar, and tracking them across the variables helps the business to continually innovate and iterating towards finding a better fit with its customers’ needs for solutions to their pain points. This invariably widens the net as the business seeks the maximum possible scope for competitive advantage.
For the investor, the questions are: Can the business do as well or better than its competitors? If it can’t, why continue? If it can, and the market can welcome another player, then the business is onto something.
5. How Will The Product Or Service Be Different? Standing out from the crowd gives a business an edge, and makes it different from its competitors. A differentiator helps a business to distinguish itself from other businesses in its market. A business can differentiate itself by focusing on a feature or benefit which solves a problem, satisfies a need, or cures customers’ pain.
There are a variety of ways a business can position itself in the marketplace. Examples include but are not limited to Convenience (ease in buying a product or using a service); Reliability (product or service that hardly fails); Quality (luxury item) and Superior Customer Service (always there for customers).
Does the business have a secret weapon? Does it have something exclusive to it, like technology, data, intellectual property, relationships, etc. to distinguish it from competitors? If it doesn’t have any of these, it must assure the investor it is prepared and able to compete as just another runner.
6. What Is The Size Of The Market? Knowing the size of the market is a foundational part of launching a start-up venture. The aspiring Small Business Owner must know to determine it, and how it will impact potential revenue in the addressable market. Investors like to see big numbers, but don’t want a business that inflates them. The business must back its claims with data and research, how they are derived and the assumptions behind them.
Does the business know the true and realistic size of the market? Who has the need for the product or service, and has the means to buy it? How many of them currently exist? Who would the business share the market with, and what piece of the pie can the business take? Is the market big enough for the investor to care? The investor wants to know that the addressable market is large enough to matter.
7. How Will The Business Make Money? In simple terms, a business makes money by finding answers to four key questions: 1.What will it sell or offer to its customers? 2. Who are the customers that constitute its primary target market? 3. Why will these customers want to buy what the business is offering? 4. How does the business make money while producing the product or providing the service, and selling them to its customers?
The answers to these questions will define the strategy of the business, which will unveil its business model. Bottom line: How will the business make money? Will it make enough money to grow to the point of turning a profit? The investor wants to know.
8. Who Are The Managers And Key Personnel Of The Business? An essential requirement for a successful start-up is its ability to pull together a management team. There must be serious thought on critical positions to be filled and who should fill them. In a small business, some staff will wear several hats, but the duties and responsibilities of each hat must be clearly identified and spelt out.
Talent is everything. The business will rise or fall with the quality of its people. The founding team must have the correct balance of personnel and skills. Potential investors want to see a team that holds the promise of taking a start-up to lofty heights.
* Do you need help in preparing a business plan for your start-up or new project? Fill out the questionnaire at https://smefinance.org/thesmelab.
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