Q: How important is a prototype in finding an investor? I've obtained a patent on a product I invented, but I don't have all the funds I need to get into production. So I'm looking for investors to kick in some money. What will I need to show them to get them interested enough to invest in my idea?
A: When you're selling your idea, you're selling yourself. Your presentation to investors should cover everything that's required to get your idea out of your head and into production. The further you take your idea in the beginning, the more you'll control your financial destiny.
Imagine one line in the sand. On the left is everything you need to produce your idea: design, prototype, packaging, patents and manufacturing requirements. On the right is your investor, who will be looking to your presentation to discover the value of your idea. The trick is getting the investor to cross over that line and understand your needs, which is why it's so important to take away the unknown. Show your investor that you--and your product--are ready for the market.
You'll want to present your idea in the form of a working prototype. Compare competing products to your idea-a better mousetrap is fine, provided it actually catches new mice! You should also show investors what your start-up costs will be in the form of a bill of materials showcasing all costs associated with your product-from manufacturing to the moment the retailer buys it. Include the return costs associated with an unhappy customer or damaged goods. Your mind-set should be one of substantiation repeated over and over. Investors want to know what it's going to cost to produce your product in quantities that will support manufacturing costs as well as wholesale and suggested retail platforms in the marketplace.
Keep in mind, your manufacturing costs should not exceed your probable wholesale price. Your investor will expect to see profits based on your manufacturing costs and acceptable wholesale pricing. Be prepared to discuss the following topics, and you'll be on your way to making money:
1. I need this much money.
2. I'm willing to give up X percent of equity in return for Y amount of money.
3. I will pay the money back in Z amount of time.
Most sophisticated investors are not marketing experts. That said, the last question you'll be asked is, "How many of these things do you think you can sell?" Answer this question conservatively and honestly.
Treat your investor as though he or she is your first customer. Why should he or she buy? Be prepared to answer any question related to your product or idea. Provide the information that you would want to hear if you were doing the lending yourself.
More often than not, the inventor who takes the time to get emotionally detached from his or her idea will be successful in securing funding. Emotions can't be financed, but good ideas based on solid research can.
Dave Dettman founded Mr. Product LLC ten years ago and currently serves as president and CEO.