I am having a difficult time getting an entrepreneur to understand that it takes more than just terrific technology and product salesmanship to raise capital.
His company is selling product, but he needs significant new capital to really impact the market. He is an outstanding salesman, but he resists accepting that it takes two types of sales to be successful in raising capital.
To get revenue, you must sell your product or service to customers. To get funding, you must sell the money-making capabilities of your company to capital sources. The two sales are completely different because what you are selling is completely different.
Product sale to customers is based on providing a product or service that fills a need of the purchaser. The sale is greatly influenced by value, the need filled, quality, service, pricing and marketing. These factors are common whether you sell technology or a traditional packaged good such as food or paper towels.
Your competitors are other companies selling mostly similar products to the same general clientele. There is some product differentiation and competition is within an industry, e.g., Nokia vs. Motorola cell phones, or General Mills vs. Kellogg breakfast cereals.
In the product marketplace, buyers may be slightly interested in your company. But it is the product or service for which they are paying, and that is what you are selling.
When you go to raise capital, you must still make a sale, but you are not selling a product or service. You are selling the ability of your company to make money. To do that, you must show that you have a marketable product or service, significant market size, proven management team and other attributes that translate into your company making a lot of money.
Buyers (capital sources) will be interested in your product, but only in regard to how you will make money. It is the company for which they are paying.
The business of capital is money. The bottom lines of a technology company and a food manufacturer are expressed in identical terms: profit and loss. Capital is not in the software, hardware, packaged goods or automobile business; capital is in the money business, and there are innumerable products and services that can generate revenue, profitability and growth.
When business owners go to the capital market, they sell their current financial state and outlook for future success.
When you raise angel or venture capital, you are in direct competition for that capital with all other companies trying to raise angel or venture funds, regardless of their product or service. You are also part of the entire capital industry and in competition with every other company that wants capital.
In the capital markets, Nokia and Kellogg — two quite different companies — are in competition with each other and, surprisingly, you. The size and risk of investment vehicles vary from government bonds to seed equity. Capital flows throughout, depending on risk and reward.
Naturally, you must have a product or service to sell in order to generate revenue. But your sell to capital is your company’s ability to exploit the commercial value of its product or service. It is your company’s ability to make money that is being judged, not merely the product. Sell your product to your customers but sell your company to capital sources. Erwin Bruder ([email protected]) is president of The Gordian Organization, which provides business planning and structuring services to startup and growing companies. He can be reached at (216) 292-2271.
