Many start-up companies are looking for funding to help them achieve their dream of creating a commercially viable company.
Before seeking funding these 3 basic questions need to be answered.
1 – Does It Work?
It’s a simple question, but it is really critical to ask up front. Many good ideas end at the idea stage. Before an investor will write a check, you have to prove that your idea works, be it technology, a new service or a new product.
Proof of concept means more than just a white paper or your own research. It really means you need to have third party validation. Sometimes you can have outside research firms contribute to the proof, but the best source is a customer that is willing to pay cash for your product or service.
Determining the market size is also part of this research. If you are trying to sell into an existing market, some of that data may be readily available, but that is when you really need to prove that you can differentiate yourself from the competition.
One of our past clients is Skullcandy, they sell headphones and earbuds – lots of them! This was not a new market – there were lots of companies selling headphones. They were able to differentiate themselves from other headphone companies by becoming one of the best marketing companies around and targeting their marketing to their core customer base. It is critical for you to verify that your business actually has a market and that the identified customers really will buy your product or service.
2 – Is Your Idea Protected?
If your idea can be protected through a patent, trademark or through other intellectual property, investors feel much more comfortable about making the investment. It is critical that you have that protection in place before exposing your idea to the market place.
Some ideas cannot be protected and the strategy is simply a “land grab” and an attempt to gain market share. Skullcandy did not have IP on its headphones, but they did a great job of marketing to a specific niche that allowed them to obtain significant market share. Your strategy has to be identified up front and executed effectively.
3 – Who Will Manage The Company?
You must show investors and lenders that your team has the experience and knowledge to manage the investment. Having highly-qualified, experienced team members who have demonstrated success will go a long way to helping you secure the investor’s trust and then their money! Your core management team members, employees and consultants / advisors have to demonstrate that they have experience in the industry you are pursuing.
It is critical that you have a CEO who is experienced in the industry. If you are a technology company, you have to have a CTO who has experience in the industry. Naturally, your CFO has to be a very seasoned veteran who can help you provide timely and accurate financial reporting as well as key performance indicators (KPI). Your KPI’s should include financial and non-financial information about your business.
A solid financial forecast is also critical to be a financial roadmap for the management team. This tells lenders and investors that the Company and its team understand their business model and are able and prepared to monitor and act on key information to therefore manage the business and achieve success.
Starting a business and raising capital is not easy but if you take the right steps to get customer traction, properly protect your concepts and have the right team your journey is more likely to lead to the desired destination!
JB Henriksen is with Advanced CFO Solutions, L.C. With over 500 clients served and experience with financing transactions totaling over $600 million, Advanced CFO Solutions is Utah’s largest and oldest provider of out-sourced CFO and Controller services.