Startup Success: Know Who Will Fund You

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RESEARCH TRIANGLE PARK, N.C. (TheStreet) -- This past week I was working with an early stage, prerevenue technology startup on financial and funding issues. We were looking at alternative funding sources (to date, the company has been paid for from the client's personal funds, personal debt and government grants).

The company has promising research results, but no commercial products. And it's reached the stage at which personal funds are maxed out, debt is not an alternative and government grants are not available for commercialization efforts such as market research and business development.

Our discussion turned to private-equity investment, and the client asked, "Who would give me money?"

For any early stage company this is a critical question. If you don't have an answer, you better be looking for one, fast.

It's also phrased as, "Why would they give me money?" and the answer is as simple. It comes down to an investor believing in you, your business and your products.

An investor must believe that you (and your team) are capable of building or creating viable products your market will want to buy, and that those sales will lead to a profitable business model. The investor must see you as credible on the business side as you are on the product and technology side.

If you don't believe in your ability to succeed, quite frankly, no one else will either (well, maybe your mom). Getting your business established and positioned in the mind of potential investors -- or bankers -- requires that you establish four critical components of your business (and your answer to "Why?").

You and your organization must be capable, credible, viable and visible.

Any organization is only as successful as its ability to demonstrate it is capable of succeeding. This includes:

  • Recruiting a strong team, business and technical
  • Developing a robust and profitable business model
  • Establishing a functioning organization that gets results
  • Setting milestones and timelines and meeting them
  • Building the capacity to deliver the technology, product and/or services the customer wants

Credibility is an extension of capability. There are many organizations that put in the infrastructure necessary to succeed, then get lost in the demonstration of that capability. You can have the best credentials and ideas, but if you can't deliver on them consistently, your credibility is shot. Your credibility is at risk when you miss milestones and other commitments; fail to enable your team to succeed (especially if this means giving up some control and surrendering leadership of the organization to more experienced business people); make promises that aren't kept; or are overly optimistic about the stage of your business, products or technology.

The old adage about "Under-promise, over-deliver" means it is better to be realistic about accomplishing your goals. Making commitments you can't keep, such as promising your product will be ready in six months when the more realistic estimate is one year, doesn't do anyone any favors. You are setting yourself and your organization up for failure.

Viability is perhaps the most overlooked aspect of product development analysis, and is established when you can demonstrate you know the marketplace and have identified a need and can fill the need with your product, technology or service.

What you are looking for is a place to get your foot in the door to prove you have commercial, valuable potential. Making the connection between the market and your organization's capabilities shows you understand where the money is and have a plan to get it. Entering the marketplace in a niche enables you to get in earlier, with less funding, and that can be the leverage needed to spread out into the marketplace ... one niche at a time. If you don't have a market or an ability to reach that market with a wanted product, you will be in the antiquated "build it and they will come" mode, with your fingers crossed that you actually have a product someone will buy.

It takes more money to enter a market and find the customer after you have a product developed than if you invest as little as 10% of your commercialization budget to finding what the market needs and tailoring your product to those needs. Searching for a market after a product is designed and in production is the most costly mistake any organization can make.

Visibility is often thought of as the volume of activity generated to get people to notice you. That perception goes right along with "any publicity is better than no publicity" and is wrong. Targeted visibility that gets you in front of the audiences you need to reach is most effective. By identifying whom you need to reach -- whether it's investors, customers, other stakeholders or a combination -- you have the opportunity to hone your message so it gets noticed and received. Media attention that doesn't position you or your organization as experts, as having a solution, and that doesn't pull in your target audience, is money poorly spent. Staying on message so your target audience can see you is the best visibility investment and strategy of any organization.

So if you don't know the answer to who and why someone would invest in your business, it is time to step back and invest the time and effort in defining your business, its mission and objective. If you do not know why someone would invest in your business ... who would?

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