Thursday, May 26, 2011

Investors want to hear about problem first, product later

Investors want to hear about problem first, product later
By Kevin Learned - Special to the Idaho Statesman

Published: 04/20/11

The Boise Angel Fund was formed four years ago. It makes equity investments in early stage Idaho companies. Since formation, the fund has considered applications from 199 companies; it has made 10 investments. Why so few? Clearly, most entrepreneurs don’t understand what the angels are seeking.

Entrepreneurs are always proud of their product or service. They frequently begin with how terrific it is. But angels and other sophisticated investors aren’t very interested in the product or service, at least not at the beginning of the conversation. Rather they want to know what problem or opportunity exists in the marketplace.

In its section on pitching an investment idea, the website for the Boise Angel Fund ( says: “Our experience is that most entrepreneurs devote too much time describing the product or service and not enough time describing the opportunity. By ‘opportunity’ we mean we are more interested in the problem the customer has and how important it is for the customer to solve this problem.”

First you have to convince investors that you have identified a problem of significant financial magnitude. After you have established this with the potential investors, then they will be interested in how your product or service speaks to that problem.

Here are two examples of Idaho companies that have raised capital from sophisticated angel investors in the past several years and the problems their products attack.

Inovus Solar ( recognized that there are millions of streetlights in the United States drawing energy from the electrical grid. Energy is costly and in short supply. Each streetlight stands in sunlight during daylight hours. Inovus recognized that a streetlight could generate its own power by converting the solar energy hitting it during the day into electricity that the pole can use at night. The company now produces and markets a line of solar light poles.

Prosperity Organic Foods: Hailey entrepreneur and scientist Cygnia Rapp suffered from digestive health problems. Her problems caused her to study the spread (e.g., butter and margarine) category.

She learned the U.S. market for butter and substitutes is $3 billion a year and that most butter substitutes are either unhealthy or targeted to address cholesterol concerns. She formed Prosperity Organic Foods Inc. ( to develop and market healthy spreads, primarily to younger women. Prosperity’s Melt buttery spread is now sold in more than 600 supermarkets in the West.

What is common about these companies is that they each began with a problem — streetlights consume electricity, many spreads are formulated from unhealthy fats. They each assessed the magnitude of the problem and concluded that they could develop and market a product that would profitably solve it.

Both companies raised local capital to fund their journey through the Valley of Death, that period of time in every new company’s life when cash goes out the door faster than it comes in.

A successful request for investment capital begins with the question: What is the problem in the marketplace, and how big a problem is it? Answer this question and you are well down the road to developing a business plan investors will find compelling.

Kevin Learned is a counselor at the Idaho Small Business Development Center, and a member of the Boise Angel Fund and the finance committee of the Idaho Technology Council. He is a shareholder in both Inovus Solar and Prosperity Organic Foods. Contact him at
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Monday, May 16, 2011

Four sources of investment capital for early-stage businesses

By Kevin Learned - Special to the Idaho Statesman
Published: 04/06/11

All businesses pass through a period when the business is spending more cash than is coming in. We call this time the Valley of Death, because if the business doesn’t reach a point where more cash is coming in than is being spent, it will die.

A common misconception is that banks will lend money to cover the shortfall. This is not the role of banks. They finance only businesses with a history of profitable operations. Early-stage businesses must look to other sources, typically equity capital.

Equity capital is risk capital. If the business does not succeed, the capital will likely be lost. If the business succeeds, the capital will earn a share of the profits.

Generally, there are four sources of equity capital, listed here by ease of access:

1. FOUNDER’S SAVINGS. This is the cheapest capital a business can have. It comes without having to share interest in the business. Frequently, no one else will accept the risk, so it may be the only capital available. And any other investor will reasonably expect that the founder has invested his or her savings. If the founder doesn’t have the confidence to commit savings, then why should a nonfounder accept this risk?

2. FAMILY AND FRIENDS. Family and friends invest because they have confidence in the founder. Often they are not experienced business people, and typically they will not do hard economic analyses. Family-and-friends capital is a mixed blessing. It may be relatively easy to raise, but in my experience, there is no pressure like that of knowing your family or friends will lose their money if you don’t succeed.

3. ANGELS. Angels are high-net-worth individuals who invest a portion of their own capital into businesses. They typically invest not just to make money, but because they like to help entrepreneurs. They will do economic analyses and will negotiate terms of their investments. They will invest only in opportunities they believe have an excellent chance of success. The Keiretsu Forum and the Boise Angel Fund are angel groups that accept applications from Idaho companies.

4. PROFESSIONAL CAPITAL. Often referred to as “venture capital,” this money is invested by professionals who make their living by investing in early-stage businesses. Typically, but not always, venture capitalists invest later in the business cycle than the above three types do. Highway 12 Ventures is a Boise venture-capital firm that accepts applications from Idaho businesses.

Raising equity capital is tough for a new business. Successful fundraising requires planning and perseverance. The entrepreneur must have identified a business problem for which there is no optimal solution, must have a product or service that can profitably solve the problem, must have a viable plan to get the product to the market, must persuade investors that he or she can execute the plan, and must present a deal to the potential investors that will allow them to make a profit in line with the risk they assume.

Kevin Learned is a counselor at the Idaho Small Business Development Center, a member of the Boise Angel Fund and a member of the Finance Committee of the Idaho Technology Council.

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Information for Entrepreneurs Seeking Angel Capital and for Angels Wanting to Invest in Entrepreneurs

I am a counselor at the Idaho Small Business Development Center and the Administrator of the Boise Angel Fund. In these two capacities I often am asked questions by both entrepreneurs seeking angel capital and by potential angels thinking of investing in an early stage business.

To address both of these, I write a column every other week in the Idaho Statesman's Business Insider magazine. Because you must have a paid subscription to the magazine to read the articles, I am going to reproduce them here after they are published in the hope that they might be helpful to both entrepreneurs and angels.

I hope you find them helpful and informative.