Karl Dakin: I sat through a number of entrepreneur pitches recently and was frustrated by the fact that none of the pitches addressed any of the keys to funding:
Without this trifecta, there is no basis for any funding, regardless if the funding is a charitable gift, an impact investment or a classical return on investment (ROI).
Benefit means that a problem has been solved and as a consequence of this solution that a customer will experience some form of positive change. If there is no problem to be solved, there can be no benefit. If there is no solution, there is no benefit. When a benefit exists, there will be one or more customers. The potential to solve the problem and benefit a customer is an opportunity. The opportunity graduates to a product or service when a clear benefit exists.
Benefit may also be considered a performance or technical test – does it (the product or service) work?
Benefit is the first key to funding in that it defines the customer, the market and those who care about the customer or who participate in the market.
Value means that the benefit to the customer exceeds the price charged for the product or service. Benefit has no value if the customer cannot afford the price charged or the benefit is equal to the price (no positive change). Once there is a benefit and value, a business opportunity exists.
Value may also be considered an economic test – can it (the product or service) be sold at a profit?
Value is the second key to funding in that it indicates possible funding sources:
- Products and services that cost more than the benefit require charitable giving or government subsidies
- Products and services that can be sold at cost or for a small profit may qualify for impact investing
- Products and services that can be sold at high profits may qualify for angel or venture capital investment
Management means the ability to operate a business resulting in the production of a product or service at a cost below the price and the ability to distribute and sell the product or service.
Management may also be considered an execution or capability test – can this team perform?
Management is the third key to funding in that each member of the team has or can develop relationships with different funding sources. In order to raise capital, a member of management must be able to communicate the benefit and value to a source of capital that matches with that benefit and value.
The combination of benefit, value and management creates a business.
Each business is unique. Raising capital requires matching the three keys of that business with sources of capital (investors, customers, partners, etc.) that care about the specific keys of that business.
Entrepreneurs seeking to raise capital must have a problem with a solution that is affordable. In telling their story to obtain capital, they must explain the three keys effectively.
The Colorado Capital Congress PBC is presenting a series of educational programs on the basics of building capital to assist businesses in Colorado. More information about these workshops can be found at: http://www.coloradocapitalcongress.com/Events