Everyday someone calls me to discuss a great idea they have. The conversation goes the same way whether it is an app for a phone, new product or service or some new way to feed a baby. It starts with elation about their new idea, then builds through the description and ends with, “What do you think?”
Four simple words that carry so much risk.
Often, they have a great idea. But, what takes an idea from a fun thought to doable? The answer is found in four little words: Money is the answer.
We must start with the end in mind. How much money can you make from the idea? Ideas do not make money. Solved problems do not make money. People paying for something is the only way money is made.
Investors do not invest in ideas; they only invest in profits. Investors do not care how unique, clever or revolutionary your idea is. They only care whether or not they can make money by investing in your idea. All too often, entrepreneurs treat investment dollars like gold stars. They think the better their idea, the more money someone will pin to their shirt. It does not work that way. Investors look at investment dollars like planting seeds and the darned plant had better turn into a money tree.
If you have not figured out to the exact detail how much it will cost to deliver a product or service, how much people will pay for it and how much will be left over at the end, you are not ready to decide if an idea is “good” or “bad.” You are only ready to have fun talking about it.
Here are the Top 5 things you need to know before you talk with someone about investing in your idea:
1. Return on Investment
How much money will they make over what period of time? Start the conversation with what matters to them. The investor did not wake up this morning asking how they could risk money on your idea. They can leave their money in the bank and know they will still have it tomorrow. You need to be able to tell them how much more they can make by trusting you with their hard earned money.
2. How They Get Paid
How do you intend to take money out of your business and pay them? Will you pay them interest on a loan or will you pay them a percentage of the profit of the business? There are multiple ways to capitalize on your company. What is the strategy you plan to employ? Keep in mind that a loan is an investment. It just has stronger hooks attached in the event you are not successful.
3. How Profits Are Made
It amazes me how few people have thought about profit. There is no way to know what your profit will be without knowing your cost. Often we think because we have a great idea, it will make money. It may or may not.
You need to know if your idea can actually be sold at a profit. Beyond that, identify if profits will be made by selling one unit at a time or through acquiring a long relationship with a customer. Investors love long relationships with customers. For example, Gillette does not make money selling razors—they are in the razorblade business.
4. Why You
Think through the question: Why are you the right person to bring this idea to market? Your experience matters to an investor. For example, if you have never been a manufacturer, then developing a great new widget, regardless of how perfect it is, makes you a bigger risk.
Additionally, think through this: Why hasn’t anyone else done it? Sometimes, there’s a good reason why no one else has done it. Just because you have not done it before and just because no one else has done it does not mean that you cannot. Have a good answer ready for this question.
5. Understand the Problem
If you do not understand why your great product or service is solving a problem big enough to get consumers to change their habits, you are not ready to invest in your own idea, let alone ask that of someone else. Think honestly about your own habits. How often do you change them simply because you see a great idea? How often do you actually build that do-it-yourself project or make that new recipe from Facebook? People are creatures of habit. Getting them to move to your solution is not easy. If you do not know why your product or service is the epicenter for change in the market, you are not ready to invest money into an idea.
Measuring the strength of your idea in the marketplace is all about how much money it will make. You only have one life to live and investors only have so much money to invest. If you do not know your outcome, all the features and benefits of your idea do not have any real value.