How do you convince investors that your business model will really work, before you have a revenue stream that exceeds your expenses? Even if you are bootstrapping your business, and you are the only investor, you should be asking yourself the same question. Too many founders have learned that passion and free beta products do not imply a sustainable business.
Proof of any business model starts with a finished product or solution, sold to a new customer for full price, with high satisfaction for the value received. Of course, that has be a repeatable event, with enough revenue to sustain the business. The conundrum is that once you have really proven the business model, you no longer need the investor money you asked for to start the business.
So what should an entrepreneur do to convince themselves, as well as potential investors, that they have a viable business model before it is totally proven? Here are some basic principles from my own experience that will improve your odds and keep you on the right track:
1. Recognize that you are not the market.
No matter how passionate you are about your solution, it doesn’t mean that if you build it, they will come. Don’t skip the market research, input from influencers, analysis of competitors, and the simple act of really listening to potential customers via social media, before quantifying your opportunity.
2. Start selling it before you build it.
Marketing is everything these days. On the average, it takes as long to build marketing momentum as it does to build the solution. If you wait to begin marketing until your product is final, you will find it very expensive to pivot to meet real world input, or the whole opportunity may have moved on without you.
3. Plan for a real revenue model.
The free model, with a loose intent to monetize later, made popular during the tech bubble, doesn’t work anymore. No matter how good your cause, it takes real money to sustain a business. Decide early where and when money will come from, set some milestones and metrics, and work to a plan, or be caught short.
4. Word of mouth is not adequate for marketing and sales.
Even though the Internet is pervasive and free, you should not assume that a website is all you need for sales and marketing. To get the visibility and distribution you need will likely require one or two levels of partner relationships and a real model for marketing, events and promotions.
5. Customer support is more than handling exceptions.
Customers expect to be delighted in all phases of the product life cycle -- understanding features, pricing alternatives, returns and problem resolution. A detailed process, with empowered employees and adequate budget, are mandatory to any viable business model.
6. Everyone must be part of the sales process.
Don’t assume that only customer-facing employees need to understand sales, and that these people can be hired and trained at the last minute. Everyone on your team must maintain the mindset that customers are the key to your business model, rather than technology or accounting.
I’m not suggesting that all these business model elements need to be perfect before you ask for funding or open doors for business. As an active angel investor, I do expect founders to be able to communicate a plan to implement all key business model elements, just as I expect them to understand and plan for all the elements of their technology and their solution.
In my experience, every great product is not a great business, and every great business model involves far more than a great product. Your challenge is to present a total business solution to the right customer set to build your credibility and momentum. Without these, your dreams and your business model may never get the fuel they need, and will burn out quickly.