Developing your idea - answering the must know questions
One of the biggest challenges that new company founders come up against is knowing what questions to prepare for when raising money. This can also inform how you build your pitch deck to take to business investors. It isn't easy to get ready for these sessions.
What you can do though is, first and foremost, put yourself in their shoes. Think from a business investor's paradigm. What sort of things would you want to know if you were going to make a significant business investment? This is an iterative process. You'll go through all the questions, come up with your answers, develop your financial model, and then revisit the questions from the financial results of your work.
Focused Energy can help your business with financial modeling and forecasting upfront as well as due diligence, fundraising and valuation when you are ready to get business investors.
Case study: CPG Company Goes Public
The 15 questions below are the core of what you'll need to answer to prove to a potential business investor that when they invest in your idea, they are investing in something that will provide them a good return. You will see that each of the 15 questions have clarifying questions that may or may not be helpful to your business in getting to the root of the answer. The answers that you get from this exercise will be a framework for creating your pitch. It's possible however, that after you've gone through this process you may come to the conclusion that your idea doesn't have the chutzpah to be valuable. Don't be discouraged. Use this process as a way to tweak your idea and make a better foundation for the long run.
The four pillars of an investable business
I've broken the segments into four sections: Idea, Market, People, and Business Model. I will briefly explain why each piece is important, and then provide the framework for you to ask the cutting questions that will force you to think through each piece of your idea and potential business.
Business investors are looking for ideas that are breakthrough, revolutionary, and have the possibility to make money. The wheels can be falling off the car, but is the engine solid? Can you drive this car to the bank? You will need to be able to clearly explain in roughly 30 seconds what your idea is and why it's going to change the world. This is the first step.
Idea questions to answer:
1. What is your idea?
- What does the company do or sell?
- What is unique or groundbreaking about your idea or the product?
- Is it a new feature, tool, or something else?
- How is this idea or product different than all the other currently out there?
- Why should the business investor even care about hearing your pitch, and why will customers want to use your product?
- How long have you been working on this idea? How has the idea evolved?
- Do you have a sample product or service that you can show business investors?
- Does it actually work, or will you just erode their confidence in it?
- What are your development goals or milestones?
- How long will it take you to get there?
- What is needed?
2. What problem does your idea solve?
- Why will users care to buy your product or service?
- Is your product or service solving a problem that customers currently have, and is that problem a large pain point?
- Do potential customers even know that there is this pain point?
Note: Convincing someone to buy your product is hard when it solves a big problem, even more difficult when what you're selling is a luxury that people can simply do without.
3. Are there similar ideas/products/services currently in the market?
- What makes your product different? How?
- Is there additional value in that differentiation? How much?
Yes, your idea is great, but is there a market for it? The market has to be sufficiently large enough so that capturing a small percentage can reap great return for business investors. Do you have "gas" to put in the car to drive it on this journey?
4. Is there a market for your idea?
- How big is the Total Available Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM)?
- Total available market (TAM) - all of the people that would ever be interested in your idea
- Serviceable addressable market (SAM) - all of the people who are interested in your idea, and ones that have the means to buy it
- Serviceable Obtainable Market (SOM) - all interested people, who can buy, who you can reach
5. How will you go to market and acquire customers?
- What channels will you use?
- How long will it take you to reach the customer with each channel?
- How much will you pay (customer acquisition cost) for new customers?
- Customer acquisition cost (CAC) - All marketing and sales spend / newly acquired customers
- What tools do you plan to use to guide your decisions in the marketing channels you're choosing?
6. What is your market penetration strategy?
- What are the foreseeable scenarios around your speed to market, and capture of it?
- How long will the invested money last - will there be another round? How much?
7. What is the competitive landscape?
- How many companies currently operate in your market?
- How big are they?
- How are you different/how do you solve a problem they can't?
- What shortcomings do you have, that your competitors don't?
If you got this far, your idea is sound, you have an addressable market that has the means and desire to purchase your product. That’s great news! Now, who on your team can deliver? Think about the technical, quantifiable, qualitative attributes of the people on your team or who you're going to hire. Leverage them in your pitch. Do you have someone(s) to put behind the wheel of your car to get you (and your business investors) where they want to be?
People questions to answer:
8. Who are the founders and key members of the team?
- What were the founder's motivations for starting the business, and are they in it for the long-term?
9. Who is on your current team?
- What are their skills and how do they add value?
- How is the current group of people able to execute on the idea and business model?
- What are their shortcomings?
10. What positions do you need to fill and when?
- What will those people be doing?
- How much will they be paid?
- Will you offer benefits, and what ones?
- Will you have employees (W2) or contractors (1099)?
- Do you understand the difference and legal ramifications of both?
Business and financial model
Wow, you've gotten quite far. You have a brilliant idea, the market is willing to (and can) buy your product, you have a few core people who are talented and able to deliver. So now, how are you going to execute? You'll never get anywhere if you don't turn the ignition, and not only drive the car, but you must also pick the right road to drive on, at the correct speed, and in the right direction.
Business model questions to answer:
11. What are the details of your business operations?
- How will you monetize your product or service?
- How long does it take to monetize your product/service?
- What does the sales cycle look like?
- How much will your charge for each service/product/good?
- What are the payment terms? Annual, monthly, paid in installments or upfront?
- Will the price rise or fall over time?
- Will your customers receive discounts for bulk purchasing?
- What are your overhead costs/operating expenses (OpEx)?
Note: These are the costs related to running your business, and developing software and product. They are not cost of goods sold, which are the costs related to delivery of your product or service. Examples are: rent, insurance, telephone bills, any employees or contractors not directly related to delivery of your product or service.
- Where are you located or do you plan to locate?
- Will you rent space? Is it needed? How much will it cost?
- Will you buy your people computers, desks, and other office equipment?
- What types of insurance will your purchase? What are the payment terms on that?
- Healthcare and employee benefit costs?
- Will you reimburse your employees for certain things? What?
- Do you still have to develop your software or product?
- What is needed to do that?
- What are your cost of goods sold (COGS)?
Note: These are the costs related to delivering your product or service. Examples are: Amazon hosting fees, inventory, freight costs, materials and people directly related to the delivery of the product or service.
12. What are your key performance indicators (KPI's) & measures of success?
- How will you measure the success of your business?
- Customer acquisition cost (CAC)?
- Customer lifetime value (CLTV)?
- Quote to close ratio?
Note: There are a multitude of ways to measure success. Each business is different, so you'll need to come up with some custom ways to measure how well you're doing.
13. Have you had any early traction?
- Have you had any app downloads, product sales or service offerings?
- Why was there traction?
- How can you make it move faster?
14. What risks are inherent in your line of business?
- Do you have unique legal, regulatory, product or service liability that is inherent to your idea?
- How will you mitigate those risks, and why will that strategy be effective?
- What types of insurance can you purchase to mitigate these risks?
- What are you doing proactively?
15. What sort of intellectual property (IP) do you have, if any?
- Does your intellectual property infringe on competitors?
- Do you have a patent, is one pending?
- Is it worth it to spend the money to get a patent?