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 (www.boiseangelfund.com) 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 (http://www.inovussolar.com/) 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. (http://www.meltbutteryspread.com/) 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 kevinlearned@boisestate.edu.
Read more: http://www.idahostatesman.com/2011/04/20/1616119/investors-want-to-hear-about-problem.html#ixzz1MXI42nTp