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As a lawyer who specializes in emerging companies and
a member of the Boston Harbor Angels, I hear 10-20
pitches a month by entrepreneurs seeking angel funding. There
are several factors that account for success or failure in
a new company's ability to attract funding. However, one
common theme always rings true: all successful businesses are based
on great ideas, but not all great ideas become successful
businesses.
Let's say you're an entrepreneur. You present your slide
deck to an angel group and deliver your presentation without
a hitch. You think it went well. However, the angels don't
like it. One of them tells you "great idea, but this isn't
a business." What on earth does that mean, and where do
you go from here?
There are plenty of great business ideas—but not all
ideas and innovations generate the kind of returns that justify
angel investor financing. Angel investors invest in solutions, not
ideas. They take significant risk in deploying their capital, and
so they naturally expect a large return. This means that there
must be a large market for your business if they are going to
consider an investment. Providing a solution to a major
business problem that exists in a large, clearly defined and
targeted market (e.g., $100+ million) will separate your business
from the rest of the pack. It's essential to capturing angel
investor interest, and the difference between the winners and
the losers.
Your business solution must also accompany a well-developed
go-to-market strategy to rapidly claim significant market share
(e.g., 20 percent-plus). As much as your solution needs to be well
thought out and easy to use, if you haven't fully developed
your thoughts on how to deploy it in the marketplace, you'll
have problems. Moreover, if the solution isn't wholly unique,
i.e., there are other competing solutions in the marketplace, it
needs to be significantly better than the others. Keep in mind that
angels prefer innovative solutions over incremental enhancements to
common products and services. Your proposed solution can't be
an "optional" one, i.e., non-essential. It should be
a need-to-have product or service.
Before making your pitch to present your solution and
demonstrate how it fits in the market, clearly identify your target
customer. You must have an identifiable market segment and show
that you have a clear understanding of the end-user/customer.
Your ability to demonstrate a significant demand for your
proposed solution from a targeted customer base will help
clear the path for funding.
Consider these two companies. The first company, Bad Co., was
a platform technology company in the social networking space.
It had literally millions of dollars worth of infrastructure
(including intellectual property) that had been purchased,
pennies-on-the-dollar, from the trustee of an insolvent company.
The entrepreneurs used this pre-existing base to create
a niche, online marketplace that brought together buyers and
sellers of goods and services. Bad Co. established strong,
strategic corporate partnerships and it marketed itself to targeted
customers in the Latino community. Neat idea, but they forgot about
eBay, Craigslist, and the dozens of other competitive sites already
up and running. Bad Co. didn't get funded.
The second company, Good Co., struggled at first trying to
define its business model. Good Co. had developed an interesting
technology using proprietary algorithms that allowed it to measure
and collect carbon credits generated through the implementation of
its bike sharing program. These carbon credits could later be sold
and traded in Europe. However, after speaking with their business
advisors and prospective investors, they soon recognized that in
order to be successful, they needed a solution for the
marketplace, not just a great idea. Moreover, they needed to
provide a solution for a market that existed, not one
that they hoped would exist. Once they demonstrated that their
technology was a solution for customers in a targeted
marketplace, specifically the "Zipcar for bikes," they
were on the path to funding. Good Co.'s real name is Zagster,
and it's one of the hottest new technology companies in Boston,
having been selected as a TechStars and MassChallenge
finalist.
So at pitch time, remember that your well-crafted explanation of
the problem you solve, how you solve it, and how big of
a market there is for your solution, is what you need in front
of the angels. Don't waste your time talking about ideas.
Solutions are heralded over good ideas all the time.
This update is for information purposes only and should not
be construed as legal advice on any specific facts or
circumstances. Under the rules of the Supreme Judicial Court of
Massachusetts, this material may be considered as
advertising.
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