Riddell: Two questions every investor wants answered
Not Business As Usual
It seems that there is a bit of local interest in the whole area of finding money to start a business. Clearly, if Grand County has any aspirations for developing a nucleus of entrepreneurship, this topic is one every existing business owner and prospective business owner needs to be familiar. Availability of startup capital is crucial for success but it does not mean that the capital all has to reside in Grand County. Great ideas will attract money but the path to money needs to be known and understood.
Unfortunately, many folks with great ideas are totally unprepared to deal with two questions virtually every potential investor wants (or should want) to know. Specifically, what is it about your product or service that is unique and can be protected and, secondly, how do I as the investor get my money out? We’ll look at each one of these in a bit more detail.
An investor wants or needs to know that his or her hard earned money has a real chance to earn some more money. This is known as an “expected return” and is the result of a balance in the mind of the investor between the risk of the investment and the reward. While the best world is low risk coupled with high reward, this, much like beauty, happens to be in the eye of the beholder. But certainly the “risk” evaluation of your particular business or service is directly tied to how unique it is and/or how easy it would be to copy it. For example, if you were trying to talk an investor into investing money in your business and your business pro formas showed excellent profits, what is it that you have that would prohibit someone else from duplicating your approach. The reasoning here is that if the “good profits” are real and there is no protectable uniqueness, then anyone else with a similar amount of money can come into the market and now the reward (profits) are no longer as good. This uniqueness is sometimes referred to as a defensible competitive advantage and often is based on Intellectual Property (IP) as in a patent, copywrited material, or proprietary process. So before you ask someone to invest, think through what it is that you have that is defensible and sustainable.
Getting my money out
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The second question regarding “how do I get my money out?” also bears some forethought. Many naïve entrepreneurs sometimes conceptualize investors as great benefactors or philanthropists. While cash to a start up company is of great benefit, very few private investors view their investment as a gift. That is, they expect a return on it and they expect a reasonable plan to get their money back out. This is sometimes referred to as an anticipated liquidity event.
The interesting thing is that most investors correctly think that every entrepreneur ought to be cognizant of at least these two requirements when they come “hat in hand” looking for money. Approaches to investors without answers to these questions are not even regarded.
If you feel that you have the greatest thing since sliced bread and you are looking for money to bring this greatest thing to the market, please keep these two simple questions in mind and be prepared to answer them when the time comes. Expand your definition of a “good idea” to include the aspects of sustainability and defensibility along with your understanding of liquidity and you just might find that individual who will want to share in your success.
Following a successful international business career, John Riddell turned his attention to small business/entrepreneurial pursuits that included corporate turn-arounds, start-ups, teaching, authoring business and sports columns and serving as VP for the Chattanooga Chamber of Commerce directing its Center for Entrepreneurial Growth.
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