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 market place.
So many great entrepreneurs spend most of their time pitching how great their product or service is and don't spend enough time talking about the size of the opportunity. The main way in which Angel investors make their money back is when a company they've invested in has a liquidity event i.e. get's acquired. The acquisition has to be at a price that will return much more than the Angels initially invested to make it worth the risk of putting money in at such an early stage. If the market or opportunity size is not big enough to allow the kind of growth needed to become an acquisition target, it is often too risky for Angel investors.
Here are two examples of Idaho companies that have successfully raised capital from sophisticated angel investors in the past several years along with the problem and opportunity size their product adresses:
Inovus Solar™ (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. It now produces and markets a line of solar light poles.
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 three billion dollars a year and that most butter substitutes are either unhealthy or targeted to address cholesterol concerns. She formed Prosperity Organic Foods, Inc. (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 have successfully 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 market place 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.